RBI Monetary Policy: Central Bank In No Hurry To Cut Rates, Say Economists

India's Monetary Policy Committee today decided to keep the benchmark repo rate unchanged for the sixth straight meeting, amid resilient economic activity and persistent concerns around elevated food inflation.

The benchmark lending rate was retained at 6.5%, along with a status quo on the stance.

The main takeaway was that the RBI is in no rush to ease monetary conditions, said Pranjul Bhandari, chief India economist at HSBC.

• In the press conference, Deputy Governor Michael Patra spoke about the intent always being to keep the call money rate aligned with the repo rate at 6.5%. But several exogenous reasons, primarily elevated government balances with the RBI, had led to the call money rate hovering at a higher 6.75%, she said. Now, with both central and state governments spending into year-end, this exogenous issue could get ironed out, keeping the call money rate more sustainably at 6.5%. This fall from 6.75% to 6.5% should not be construed as the RBI’s indication of monetary policy easing, Bhandari said.

• The RBI explained that its stance of “withdrawal of accommodation should be seen in the context of incomplete transmission of repo rate hikes and inflation ruling above the 4% target."

• The RBI raised its FY25 growth target from 6.5% to 7%. This is higher than consensus expectations of about 6.3%, according to Bhandari. "If RBI believes growth to be this strong, the need for monetary easing may not be urgent. Rather, its utility may be more to align real rates (for instance, neutral real rate of approximately 1.25% alongside one-year-ahead inflation expectation of 4.75%, gives a repo rate of 6%, which is 0.5 percentage points lower than where its trending now). And that can wait for a bit longer." 

While there is no rush to ease via liquidity, stance or rates, going ahead, the call money rate may align better with 6.5% than in the past few months, said Bhandari.

"Our sense is that the RBI will wait (for) cues from the Fed before deciding its next step. We expect a light easing cycle of two 25 basis point repo rate cuts from June onwards (in line with our Fed call of first rate cut in June), taking the repo rate from 6.5% now to 6% by year-end," Bhandari said.

"Going into the meeting, our base case was for a change in stance to neutral in April and cumulative rate cuts of 50 basis points, starting in August," said a research note by Citi. "We now think RBI could stay on hold for longer as it cautiously navigates the last mile of disinflation towards the 4% target," it said.

Consequently, Citi now expects their view of stance change to be neutral in June and sees the first rate cut in October. "We continue to see a cumulative 50 basis point rate cut in 2024, but the balance of risks is tilted towards a more protracted rate-cutting cycle," it said.

Strong growth momentum this year as well as next year, above-target inflation, and anticipation of firmer service demand have convinced the central bank to leave the rates unchanged and maintain a cautious stance, said Radhika Rao, senior economist at DBS Group.

Keeping inflationary expectations anchored and taking inflation towards the 4% target on a sustainable basis are in focus, suggesting a dovish pivot is not imminent, said Rao. Market pricing for rate easing might be further pushed out.

Liquidity management is likely to be two-way to keep the banking system in a mild deficit and align with the overall anti-inflation stance, she said.