New Delhi, August 2024.
RBI’s 4% target due to high food prices, the government’s revision of the consumer price index might ease future spikes. Bloomberg Economics predicts a 25-basis point cut. The RBI faces internal pressure for policy adjustment, with some MPC members advocating for rate cuts. Despite global trends, Das emphasises India’s independent policy, supported by strong reserves. Economists foresee a shift to a neutral policy stance. The RBI’s liquidity management, post-JPMorgan bond index inclusion, will also be crucial in this decision.
Shanti Ekambaram, Deputy Managing Director, Kotak Mahindra Bank, said “The MPC’s decision to maintain status quo on policy rates and stance underscores their commitment to managing inflation and ensuring price stability. With food inflation contributing 46% of the total inflation basket, it’s critical to address this to prevent spillover risks to core inflation. Growth remains resilient, with steady urban consumption, emerging rural demand, stable manufacturing, and buoyant services growth projected over the next three quarters. The expectation of a normal monsoon further supports stability in agriculture.
In light of global financial market volatility, divergent stances by central banks worldwide, resilient domestic growth, and higher food inflation, the MPC’s decision to keep rates unchanged is prudent. The MPC’s focus on maintaining price stability and targeting sustainable inflation of 4% is clear. Seems like we must remain patient regarding any potential changes in stance or rate cuts.”
After today’s decision, India is positioned as an outlier in its interest rate stance, among the top economies. Most major economies like the US, Euro region and UK are facing high core inflation and low food inflation, unlike in India. Despite that there has been a shift towards dovish messaging. Japan was the only other major economy, apart from India, where food inflation is driving overall inflation. After the recent market fallout, BoJ is also sending dovish signals once again. I hope RBI can pivot at the most opportune moment to avoid falling behind the curve. Lowering borrowing costs will be in sync with PM Modi’s views on raising private sector investments, shared a few days ago during a CII meeting, said Debopam Chaudhuri, Chief Economist of the Piramal Group.
“The RBI expectedly kept rates and stance unchanged with unambiguous focus being retained on inflation. With growth remaining robust the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend. We continue to expect scope for change in stance in the October policy with rate cuts beginning from December. The prospects of simultaneous change in stance and rate cuts could increase depending on how domestic inflation and global environment transitions.” Said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
