Status quo on key policy rate is cautious optimism on growth

Exactly a week after the FM presented the interim budget for 2024-25, RBI Governor Shaktikanta Das announced MPC status quo on interest rate decision, which is on the expected lines. To be sure, no one had really expected the RBI to actually lower the policy repo rate on February 8. But an unexpectedly low fiscal deficit target of 5.1% of GDP for 2024-25 will not go unnoticed. The RBI has kept monetary policy unchanged, as broadly expected, with no change in interest rates or policy stance. Both with a 5-1 voting, Prof. J.R. Varma wanted a 25 basis points cut with change in stance to neutral. However, the Governor reiterated the importance of achieving a four per cent inflation target. The apex bank has forecast real GDP growth at seven per cent in FY25, with inflation at 4.5 per cent versus seven per cent and 5.4 per cent, respectively in FY24. It should be noted that the FY25 growth forecast has been revised up, while keeping inflation broadly unchanged. Quite, interestingly, for almost a year, the Reserve Bank has kept the short-term lending rate or repo rate stable at 6.5 per cent.

The benchmark interest rate was last raised in February 2023 to 6.5 per cent from 6.25 per cent to contain inflation driven mainly by global developments. Shaktikanta Das also made an important caveat that the stance primarily refers to the MPC’s intent on controlling inflation and with reference to ongoing transmission of rates and not necessarily to liquidity conditions. Now the first rate cut not before August, as per SBI Caps, given the inflation-growth dynamics currently expected.

The Governor’s other caveat that the stance primarily refers to the MPC’s intent on controlling inflation and with reference to ongoing transmission of rates, and not necessarily to liquidity conditions. In fact, the tone on inflation was cautious, with the primary focus on food prices, which could generalize and cause havoc. The RBI remains vigilant of continued geopolitical shocks, supply chain disruptions and erratic weather conditions.

Nevertheless, it kept its FY24 CPI estimate unchanged at 5.4 per cent, inching down its Q4 forecast. Importantly, it projects FY25 CPI at 4.5 per cent, which is above the oft-repeated target of four per cent. The downward revision in quarterly trajectory, however, will be a positive for the markets. The central bank expects the current account deficit to be eminently manageable in FY24 and FY25. Many analysts expect CAD to close at one per cent of nominal GDP in FY24.

The meaty forex buffers would largely take care of any fluctuations in global prices impact merchandise imports or a slowing of software exports. Overall, there were no major announcements, hinting at an imminent easing. The RBI has been managing daily liquidity with overnight infusion, as and when required. One doesn't see easy monetary policy anytime soon, especially with such strong growth.