Key View
- The Reserve Bank of India stood pat in its December meeting, as we expected.
- While the accompanying statement sounded hawkish, we think another quarter of soft growth in Q3 FY2024/25 (April-March) will prompt the Bank to cut by 25bps in Q4 FY2024/25.
- We still expect the Bank to take a cautious approach to easing in FY2025/26 and forecast 50bps in cuts over that year.
The policy board of the Reserve Bank of India (RBI) voted 4-2 to leave monetary policy settings unchanged in its December meeting, as we and 62 out of 67 economists polled by Reuters had expected. The policy board also maintained a neutral stance on monetary policy.
Governor Shaktikanta Das’s remarks were hawkish in our view. While he acknowledged the sharp drop in GDP growth in Q2 FY2024/25 (April-March) he downplayed the slowdown, describing it as an ‘aberration’. And the Bank expects growth to recover to 6.8% in Q3 FY2024/25 and further to 7.2% by the final quarter. Instead, Governor Das stressed the importance of bringing inflation back down to target, opining that it is vital to ensure steady economic growth. It is also worth noting that while the RBI’s mean expectation is for headline inflation to fall to 4.5% y-o-y, its large forecast range suggests inflation could even rise to around 7% instead.
Outlook For Next Meeting
We have some sympathy for the Bank’s hawkish tone. If anything, the Bank’s mean inflation forecast may be too optimistic – we think inflation will probably stay close to the Bank’s 6% target upper-bound through the rest of FY2024/25 (see chart below).
The Reserve Bank of India (RBI) has signaled its intention to remain cautious amid an evolving economic landscape marked by global uncertainties and domestic challenges. As the central bank navigates these complexities, it emphasizes the need for prudent monetary policies to maintain economic stability. With inflationary pressures and volatile global markets, the RBI’s approach aligns with its mandate to ensure price stability while fostering a conducive environment for growth.
Governor Shaktikanta Das and his team at the RBI have been vigilant in monitoring various economic indicators, including inflation rates, GDP growth projections, and exchange rate movements. The central bank’s cautious stance is reflected in its decisions regarding interest rates, liquidity management, and regulatory measures. By maintaining a balanced approach, the RBI aims to cushion the economy against external shocks while ensuring sustainable domestic consumption and investment.
Furthermore, the RBI’s caution extends to its handling of challenges such as fluctuating commodity prices and geopolitical tensions. This strategic prudence is crucial in safeguarding the Indian economy’s resilience in the face of global disruptions. As the RBI reaffirms its commitment to stability, stakeholders anticipate its continued vigilance and adaptability in addressing both present and future economic hurdles.
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