The Reserve Bank of India's monetary policy committee kept the repo rate on hold at 6.50 per cent for the fifth consecutive time, while also maintaining "withdrawal of accommodation" stance. Most analysts had expected this status quo to continue. But, what everyone was keenly eyeing was for any signal on the outlook.
Here, the central bank gave mixed signals. On growth, it was clearly bullish; the GDP growth forecast for the current financial year ending March 2024 has been raised to 7.0 per cent from 6.50 per cent. This was mainly on the back of the better-than-expected 7.6 per cent growth in the September quarter, and RBI officials noted that growth indicators in October and November had remained strong.
On the inflation front, however, the MPC maintained a tough stance, warning that a spike in food prices could lead to an uptick in CPI (consumer price index) in November and December and that the monetary policy must be actively disinflationary. Yet, RBI Governor Shaktikanta Das warned that policymakers had to be mindful of the risk of overtightening. What was he suggesting?
In the post-policy interaction with reporters, Das made it clear that taming inflation remained the key focus and there was some distance to cover still on that front.
"Inflation is our top priority now. We have still a distance to cover to reach four per cent. A few months of good data should not push us into some kind of complacency and the fact that inflation has come within the target range also should not lead to any kind of complacency. It would be wrong to think or assume that a change of our approach or any kind of loosening etc. is around the corner. That is not on the table at the moment," he said.
While inflation, including core inflation, has come down in recent months (CPI was at 4.87 per cent in October), it is not expected to decline further closer to four per cent anytime soon. According to RBI's forecast, inflation in the third and fourth quarters is expected to be at 5.6 per cent and 5.2 per cent respectively. It is only in the September quarter of 2024-25 that inflation is seen touching 4 per cent and rising again to 4.7 per cent in the December quarter of next year.
In this backdrop, analysts say the RBI will continue to maintain a long pause on interest rates and any cut in the repo rate is unlikely till at least the second half of next year.
"We expect RBI to remain on a prolong pause extending into mid-FY2025 with resilient growth and uncertain inflation outlook. Policy stance is unlikely to change anytime soon as inflation is expected to remain above five per cent target till first quarter of FY2025," said Gaura Sengupta, India economist, IDFC First Bank.
Unmesh Kulkarni, managing director and senior advisor at Julius Baer India, said the successive messaging by the MPC over its last three-four policies reaffirms their view that the rate hike cycle is over, and RBI will rather use its liquidity management tools to keep inflation under check. But, he too believes there will be an extended pause.
"Given the continued concerns and focus around inflation, we are unlikely to see any reversal in policy rates anytime soon, at least till mid-2024," said Kulkarni.
The evolving global growth and rate situation will also be a key determinant of RBI's policy actions going ahead, he added.
Inflation has been cooling in major economies like the US and therefore it is being widely expected that the Federal Reserve is also done with its monetary policy tightening and could start cutting rates sometime next year.
Madhvi Arora, lead economist at Emkay Global Financial Services, feels the RBI will stay vigilant and it is unlikely to precede the Federal Reserve in any policy reversal in calendar 2024.
Sonal Badhan, economist at Bank of Baroda sees Friday's monetary policy announcement a "balanced hold."
"Dovish tone of the policy (mention of risk of overtightening) was balanced by reaffirming the central bank's view that a few months of good data should not imply a shift in stance and that RBI continues to target bringing inflation down to four per cent on a durable basis. We do not see a shift in stance even in the next policy statement and probability of any rate cut is ruled out before Q2 of FY25," said Badhan.
According to Dharmakirti Joshi, chief economist at CRISIL, although the repo rate may have been left unchanged, there could be de facto tightening as the RBI may continue to use liquidity compression as and when needed to speed up transmission and rely on macro prudential measures to manage risks to financial stability.
Joshi said any possible rate cuts could only be in the first quarter of the 2024-25 financial year.
Paritosh Kashyap, president and head of wholesale banking at Kotak Mahindra Bank, also feels any rate cuts will be only in the second half of calendar 2024.
"Inflation, mainly food component, and global factors, especially policy decision by the US Fed will play a huge role in domestic rate cuts. Less hawkish commentary in consecutive policy statements seems to be taking us closer to rate cuts by the second half of 2024," said Kashyap.