– By Aditi Nayar
The broad consensus was that the Monetary Policy Committee (MPC) was going to maintain the status quo on the policy rates and stance in its first bi-monthly policy review meeting for FY2025. This is what transpired, making it the seventh consecutive instance of a pause by the Committee. The voting pattern on both, the policy rates and stance, remained unchanged at 5:1 from the previous meeting, with the dissenting member voting for a 25 bps cut and a change in stance to neutral. Overall, the Committee continued to stress on elevated food inflation levels and the associated risks on that account, and the need to durably temper the headline CPI inflation to 4%, thereby confirming that monetary easing remains highly unlikely in the near term.
In spite of the upward revision in the NSO’s forecast for GDP growth in FY2024 (to 7.6% in the Second Advanced Estimates or AE from 7.3% in the First AE), the MPC presciently kept its own growth projection for FY2025 unchanged at a robust 7.0%. It marginally tweaked the quarterly forecasts, while keeping them centered in a narrow range of 10 bps around the 7.0% mark for each of the four quarters. This is at odds with our expectations; firstly, we expect GDP to grow by a lower albeit healthy 6.5% in FY2025. We also project the growth outcomes to be quite uneven through the year, with moderate prints of 5.5-5.9% in H1, followed by a pick-up to 7.1-7.2% in H2 aided by a back-ended Government capex after the General Elections and the monsoon season, a likely pick-up in private capex, improved rural demand if the monsoon turns out to be favourable, and some improvement in export growth.
On the inflation front, the Committee pared its Q1, Q2 and Q4 FY2025 projections by 10-20 bps, while maintaining its average CPI inflation forecast at 4.5% for FY2025. While exuding confidence that the elephant of inflation has left the room, the policy statement and Governor’s speech were peppered with references to inflation risks, stressing that healthy growth outcomes afford the space to remain vigilant on inflation. These include low reservoir levels, the outlook of higher-than-normal temperatures during Q1 FY2025, tight demand-supply conditions for certain crops, upward bias on cost-push pressures faced by firms, rising international crude oil prices, and geopolitical risks.
ICRA expects the CPI inflation to average at 4.6% in FY2025, amid slightly higher projections for H2 FY2025 vis-à-vis the MPC. We broadly concur with the MPC’s assessment of the risks to inflation, particularly related to the anticipated heatwave during April-Jun 2024, and its potential impact on perishable prices, as seen in the past. Given this, and the growth and inflation projections being based on the premise of a normal monsoon, we believe that any monetary policy action should be pushed out until there is some clarity on these fronts.
The RBI Governor also highlighted that robust growth prospects provide the policy space to remain focused on inflation. However, given our relatively pessimistic view on the growth outlook for H1 FY2025 vis-à-vis the MPC, we believe that the easing in CPI inflation could provide some room for rate cuts during the fiscal.
Overall, we expect the MPC to stay on hold in the next policy meeting in June 2024 and change its stance thereafter in August 2024, after there is some visibility on the monsoon turnout and clarity on the US Fed’s actions. We foresee the earliest rate cut only in October 2024, while expecting the total quantum of rate cuts to be limited to 50 bps at best in the awaited easing cycle.
Interestingly, in the post policy conference the RBI Governor highlighted that given the average GDP growth of 8.0% over past three years ending FY2024, India’s potential GDP growth may have risen, and the ideal real interest rate may no longer be 1.5%, which was based on an FY2022 study. If the proposed study assesses the real interest rate to be higher than 1.5%, this may well further delay rate cuts beyond FY2025, given the current inflation projections, unless there is a large downside surprise in growth outcomes.
(Aditi Nayar is the Chief Economist, Head- Research & Outreach at ICRA.)
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