Do it yourself

Yesterday, the Reserve Bank of India announced the outcome of the meeting of its Monetary Policy Committee (MPC) held on 7-9 October 2024. The MPC decided to:

(i)    Leave the key policy rates unchanged with a majority 5:1 vote. Dr. Nagesh Kumar (the recently inducted MPC member) voted in favor of a 25bps cut.

(ii)   Change its policy stance from change from withdrawal of accommodation to neutral with unambiguous focus on a durable alignment of inflation with the target, while supporting growth.

The MPC decision did not come as a surprise, given the resilient growth environment and inflationary risks emanating from geopolitical escalations and erratic weather conditions.

The MPC noted that—

(a)   The global economy has remained resilient and is expected to maintain stable momentum over the rest of the year, amidst downside risks from intensifying geopolitical conflicts.

(b)   The domestic growth outlook remains resilient supported by domestic drivers – private consumption and investment. Real GDP registered a growth of 6.7% in Q1:2024-25, driven by private consumption and investment. Looking ahead, the agriculture sector is expected to perform well on the back of above normal rainfall and robust reservoir levels, while manufacturing and services activities remain steady. On the demand side, healthy kharif sowing, coupled with sustained momentum in consumer spending in the festival season, augur well for private consumption. Consumer and business confidence have improved. The investment outlook is supported by resilient non-food bank credit growth, elevated capacity utilization, healthy balance sheets of banks and corporates, and the government’s continued thrust on infrastructure spending.

(c)   The progress of ‘disinflation’ is still incomplete. Headline inflation declined sharply to 3.6 and 3.7% in July and August respectively from 5.1% in June. Going forward, the September inflation print may see a significant pick-up as base effects turn adverse and food prices register an upturn. Recent upturn in key commodity prices, especially metals and crude oil needs to be closely monitored. Risks stem from uncertainties relating to heightened global geo-political risks, financial market volatility, adverse weather events and the recent uptick in global food and metal prices. Hence, the MPC has to remain vigilant of the evolving inflation outlook.

The MPC policy statement sounds to me as follows:

The resilience of growth and incomplete mission to tame inflation does not warrant an immediate policy rate cut. The upside risk to inflation, especially geopolitics (middle east escalation) and climate (LaNina impacting Rabi crop) are material and need to be provided for adequately. Besides, the evidence suggesting that the present policy rates are restricting growth is insufficient. A rate cut now could waste the whole effort made since February 2023. We are changing the policy stance to a ‘heavily guarded neutral’ just to secure an optionality to cut rates, mostly to keep the market participants engaged. December 6, 2024 rate cut is not on the table as of now. A pre-budget February 2025 cut discussion might take place, but the decision would be influenced by the need to protect INR rather than stimulating growth. 

For records the MPC projected—

• CPI inflation for 2024-25 at 4.5% with Q2 at 4.1%; Q3 at 4.8%; and Q4 at 4.2%. CPI inflation for Q1:2025-26 is projected at 4.3%; with the risks evenly balanced.
• Real GDP growth for 2024-25 unchanged at 7.2% with Q2 lower at 7.0%; Q3 higher 7.4%; and Q4 unchanged at 7.4%. Real GDP growth for Q1:2025-26 is projected at 7.3%, with the risks evenly balanced.