In line with our’s and market expectations, the Monetary Policy Committee (MPC) of the RBI at its first bi-monthly meeting for FY25, maintained a status quo on repo rate at 6.50%, while maintaining its policy stance of ‘withdrawal of accommodation’.  This marked the seventh consecutive monetary policy meeting and the first in the current fiscal with no action on rates accompanied by an unchanged stance.

• Status quo on rates and stance was backed by all MPC members but one. 
• Prof. Jayanth R. Varma voted for a 25 bps cut and a change of stance to neutral, as in the last few meetings. 

Macroeconomic economic outlook

With respect to FY25 economic outlook -

• The RBI retained FY25 GDP growth forecast at 7.0%. On a quarterly basis, the central bank projects GDP growth at 7.1% in Q1 FY25 (revised lower from 7.2% earlier), 6.9% in Q2 FY25 (revised up from 6.8% earlier), 7.0% in Q3 FY25 (unchanged), and 7.0% in Q4 FY25 (revised up from 6.9%).
• Forecast for FY25 CPI inflation was retained at 4.5%. On a quarterly basis, the central bank expects CPI inflation at 4.9% in Q1 FY25 (revised lower from 5.0% earlier), 3.8% in Q2 FY25 (revised lower from 4.0%), 4.6% in Q3 FY25 (unchanged), and 4.5% in Q4 FY25 (revised lower from 4.7% earlier)

Key takeaways and outlook

• Since the last policy review in Feb-24, the growth-inflation dynamics have played out favorably in the domestic economy. Growth momentum has continued to hold-up well, surprising continually on the upside. There appears to be an upside to NSO’s FY24 GDP growth of 7.6%, to the tune of 20-40 bps as per RBI and Government officials. In addition to this, global growth too has fared better (as per forecasts of key international agencies), although geopolitical tensions continue to simmer in the backdrop. 
• Meanwhile, CPI inflation has continued to moderate lower, in Q4 FY24. The pace of disinflation in fuel is likely to deepen amidst the reduction in LPG, petrol and diesel prices in Mar-24, which in turn is anticipated likely to push headline inflation lower in the range of 4.5-4.6%. Thereafter, El Nino conditions turning neutral Apr-24 onwards, is likely to augur well for 2024 Southwest monsoon and in turn, the outlook on food inflation. 
• Having said so, the virtue of maintaining status quo on rate is reinforced by the fact that CPI inflation is not expected to align with the target in FY25. The bi-annual Monetary Policy Report though projects FY26 CPI inflation at 4.0% - an aspirational goalpost to be attained in the medium term. 

As such, we continue to maintain our view of a continuing pause in the next policy meetings in Jun-24. Possibility of rate cut commencing in Aug-24 could arise, basis evolving clarity on –

• The timeline of US Fed rate trajectory, which is likely to commence in Jun-24, as per current market expectations 
• Risks from the geo-political disturbances in West Asia need careful monitoring, for any negative consequences for core inflation via higher insurance/logistic costs. 
• The onset of Southwest monsoon rains 

Meanwhile, with crude oil prices breaching the USD 90 pb and short term food prices vulnerable to an intense summer, the upside risks to retail inflation also can’t be ignored and need to be on close watch.

• Ongoing geopolitical tensions amidst continued economic resilience has fanned crude oil prices, which have risen from close to USD 80 pb levels during Feb-23 MPC review to USD 91 pb levels currently. RBI’s forecast of 4.5% CPI inflation in FY25 assumes an average oil price of USD 83 pb as per its Monetary Policy Report. An increase of 10% on a sustained basis could provide an upside risk of 30 bps to CPI inflation.
• Excessive heat anticipated in the summer months of Apr-May-Jun-24, as per IMD, could have an adverse impact on price of some perishables. 

The central bank is likely to ensure that its stance on liquidity remains in sync with that of monetary policy. As such, a gradual withdrawal of core liquidity surplus (that is estimated at Rs 2.28 trillion as of Mar 29, 2024, down from its peak of Rs 3.83 trillion as of Aug 4, 2023) would remain underway to ensure complete transmission of past monetary policy actions. Meanwhile, fine-tuning operations in the form of variable rate auctions are likely to get enhanced to account for volatility with respect to government’s cash management activities and portfolio flows.

G-sec View

While the present macro-financial conditions appear comfortable, changing dynamics with respect to potential delay in Fed pivot and food price pressures in the near term could provide some uncertainty to g-sec outlook. Nevertheless, we continue to expect 10Y yield to moderate towards 6.50% levels by Mar-25 given India’s inclusion in EM bond indices amidst lower fiscal borrowing and the commencement of RBI’s policy easing from mid-FY25.

Says Suman Chowdhury, Chief- Economist and Head- Research “RBI MPC has kept the status quo on the interest rates and the monetary stance for the seventh consecutive time. Not surprisingly, RBI has continued to reaffirm its commitment to durable disinflation and price stability without providing any guidance on the timing of the monetary policy pivot. The central bank would continue to be watchful about the increased crude oil prices and any upward risks in food inflation in the near term, given the forecast of an intense upcoming summer season. The governor highlighted the significance of keeping the “elephant” (metaphor for high inflation) way in the forest and not in the room for a durable period.

The growth expectations for RBI continues to be strong with the GDP growth forecast for FY25 retained at 7.0%, reaffirming the strong momentum in domestic economic activity. The latest PMI data for Mar-25 has highlighted the optimism around both the manufacturing and the services sector. RBI also appears to be positive about the capex cycle and the likelihood of it getting more broad based in the new fiscal. Its assessment on global growth and trade also remains positive despite the persistent geo-political risks. Our outlook on the domestic growth prospects is relatively moderate with a forecast of 6.7% for FY25, given the muted private consumption growth as compared to gross fixed capital formation. On the inflation front, RBI has retained the CPI inflation forecast at 4.5% for the current fiscal; we have pegged it higher at 4.8% since there are potential risks to food and fuel inflation.

Given the tone of the MPC statement and the expectation of strong domestic growth, we believe that there is a low likelihood of any rate cut by RBI in the next six months.”

Chart: Food price pressures in select segments continue to remain elevated