The Reserve Bank of India (RBI) declared its initial monetary policy for FY25 on April 5, 2024. With a 5-to-1 majority vote, the RBI’s Monetary Policy Committee (MPC) opted to maintain the key policy repo rate at 6.50 percent for the seventh consecutive time. The committee, consisting of six members, also retained the stance at “withdrawal of accommodation.” Notably, Professor Jayanth Varma dissented from the majority, advocating for a 25 basis points (bps) reduction in the policy repo rate and a shift in stance to neutral. The transmission of the cumulative 250 bps policy rate hike since May 2022 into the economy is still ongoing as per the RBI’s assessment.
The governor, while addressing the issue of “CPI inflation,” metaphorically termed it as the “elephant in the room.” Despite expressing confidence and likening the situation to the elephant returning to the forest after a walk, the governor noted in the commentary that persistent pressure from food prices remains a hindrance to achieving the targeted disinflation process, which aims at a 4 percent inflation rate.
Also read: RBI Governor Shaktikanta Das’ Address on Monetary Policy 2024: Full Text
Furthermore, although the country anticipates extreme summer conditions amidst rising crude oil prices and ongoing concerns about supply chain disruptions due to the Red Sea crises, the MPC chose to maintain its inflation forecast at 4.5 percent, assuming normal monsoon conditions. This decision underscores the MPC’s steadfast focus on price stability in the face of prevailing economic challenges.
During the announcement of the first monetary policy for FY25 on April 5, 2024, the Reserve Bank of India (RBI) revealed that the Monetary Policy Committee (MPC) voted with a 5-to-1 majority to maintain the key policy repo rate at 6.50 percent, extending its stability for the seventh consecutive time. The committee, comprising six members, also decided to retain the stance at “withdrawal of accommodation.” Notably, Professor Jayanth Varma dissented from the majority view, advocating for a 25 basis points (bps) reduction in the policy repo rate and a shift in stance to neutral. The transmission of the cumulative 250 bps policy rate hike initiated since May 2022 into the economy is still in progress, according to the RBI’s assessment.
The governor of the RBI highlighted concerns about rising public debt to GDP ratios in various countries, underlining the potential impact on the global financial system. However, he reassured that India remains committed to fiscal consolidation, positioning the economy for non-inflationary growth in the future.
Additionally, the MPC noted resilient domestic economic activity supported by robust investment demand and positive sentiments among businesses and consumers. The RBI maintained its GDP growth forecast at 7 percent for FY25, with risks evenly balanced, providing the central bank with flexibility to consider rate adjustments later.
Externally, the Indian Rupee remained stable, while capital flows surged in the latter half of FY24, primarily driven by foreign portfolio investments. Effective liquidity management by the RBI was evident, with the weighted average call rate (WACR) closely aligning with the policy repo rate, ensuring market stability.
Looking forward, expectations suggest the Federal Reserve may initiate rate cuts by the end of Q2-2024, with anticipated cumulative cuts in 2024. Despite a moderation in inflation since mid-2022, it remains above the Fed’s 2 percent target level.
In conclusion, while the Indian economy demonstrates resilience, inflation risks persist, particularly from food, fuel, and global shipping. The RBI reiterated the importance of an actively disinflationary monetary policy to achieve the 4 percent target. The central bank remains adaptable, employing tools such as variable rate repo and reverse repo, based on evolving liquidity conditions.
Anticipations include a change in stance in Q2FY25 and potential 50 bps rate cuts later in FY25. Overall, the policy reflects a balanced approach, with the RBI’s confidence in long-term rates and term spreads signaling optimism for duration play, advising investors to consider increasing duration in their portfolios accordingly.
Sources: moneycontrol.com
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