During the February 2024 meeting, the RBI Monetary Policy Committee (MPC) opted to keep the repo rate steady at 6.5% and maintained its existing policy stance, which remains geared towards actively reducing inflation to ensure that headline inflation aligns with the 4% target over the long term. The decision to maintain the stance unchanged stems from incomplete transmission of rate increases to the credit market.

The RBI Governor highlighted ongoing uncertainties in food prices that continue to impact the trajectory of headline inflation. The MPC will vigilantly monitor any indications of widespread food price pressures that could undermine progress in easing core inflation. Additionally, the Governor acknowledged that liquidity conditions are influenced by external factors, such as high government balances, and the Reserve Bank intends to utilize an appropriate mix of tools to manage both short-term and lasting liquidity.

The RBI’s projections for fiscal year 2025 anticipate inflation at 4.5% year-on-year, while retaining the forecast for fiscal year 2024 at 5.4%. Favorable rabi sowing and adjustments in seasonal vegetable prices bode well for the inflation outlook. However, risks to this trajectory exist due to adverse weather conditions and disruptions in the supply chain arising from geopolitical tensions.

Expectations for real GDP growth in fiscal year 2025 are set at 7% year-on-year, with household consumption expected to strengthen. The outlook for fixed investment appears promising due to an upswing in private capital expenditure, improved business sentiment, strong financial positions of banks and corporations, and sustained government focus on capital expenditure. Nevertheless, the growth forecast faces challenges from geopolitical tensions, volatile financial markets, and economic fragmentation.

We anticipate the RBI to maintain its current stance at least until the June 2024 policy review. Monitoring the Rabi season production and IMD monsoon forecasts for 2024 will be crucial in assessing the trajectory of food inflation. Given the confidence in GDP growth, monetary policy will continue to prioritize achieving the inflation target. The RBI is also expected to keep liquidity close to neutral levels to mitigate risks to financial stability and inflation associated with excess liquidity, and to align overnight rates with the repo rate.