- The RBI monetary policy committee kept rates on hold, with hawkish undertones.
- The growth-inflation mix backs a pause, in contrast to global cues.
- Food is likely to delay a return to the 4% target.
- Implications for forecasts: We expect the RBI MPC to keep on hold for rest of 2024.
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Decision and economic assessment
The RBI monetary policy committee (MPC) kept the repo rate on hold at 6.5%, with hawkish undertones. The vote was 4-2 split, with two dissent votes by external members of the MPC, who backed a 25bp cut. The commentary reinforced that India’s growth-inflation mix backed a pause, in contrast to global cues for a dovish pivot. The Governor also pushed back on calls for non-food or core inflation to be given a bigger weightage in the price targets. Citing the close correlation between food and fuel movements to inflationary expectations, the central bank reiterated that headline inflation will remain as the main price target. With the currency bucking the broader dollar pullback, the RBI’s decision to keep rates on hold augurs well for the rupee. We also note that the composition of the policy committee is likely to undergo a change as external members end their tenure at the start of 3QFY25.
On growth, the MPC retained its optimism, with growth expected to average 7.2% in FY25 and start FY26 on a positive note with 1Q (Apr-Jun25) growth also pegged at 7.2%. A host of high frequency numbers, including the improvement in monsoon, better rural demand, industrial output, services sector activity, ongoing revival of private consumption, and signs of pickup in private investment activity, backed the positive view. The view on inflation still veered towards being more cautious. Despite favourable base effects, the run-rate on Jul-Aug inflation suggests that the quarterly average is likely to be north of 4% vs 4.9% in 1QFY25 (Apr-Jun24). Mirroring this concern, the quarterly profile for the inflation was raised, especially for the 2QFY25 by 60 bp to 4.4% (see table), which leaves FY25 average inflation at 4.58%.
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