At the June 2024 meeting, the RBI Monetary Policy Committee (MPC) decided to maintain the repo rate at 6.5%. The policy stance also remained unchanged to ensure the anchoring of inflation expectations and fuller policy transmission. The monetary policy continues to be disinflationary as the MPC remains committed to aligning inflation with the 4% target on a durable basis.
The RBI Governor emphasized that food prices warrant close monitoring, and the MPC remains vigilant to the spillover risks to headline inflation from food. The MPC statement also mentioned that the rising incidence of adverse climate events creates considerable uncertainty regarding the food inflation trajectory. The Governor clarified that while the RBI considers the impact of monetary policy in advanced economies on Indian markets, its actions are primarily determined by domestic growth-inflation conditions and the outlook.
The RBI maintained the CPI forecast for FY25 at 4.5% YoY, with quarterly projections also remaining unchanged since the last policy. Food inflation pressures are expected to ease with a normal monsoon. However, input cost pressures due to the firming up of non-energy commodities and volatile crude oil prices pose upside risks to inflation.
The RBI raised the FY25 GDP growth forecast to 7.2% YoY from 7% in the April 2024 policy. An ‘above normal’ monsoon, as forecasted by IMD, bodes well for agriculture and rural demand. Investment activity is likely to remain on track, supported by high capacity utilization, healthy balance sheets of banks and corporates, the government’s continued focus on infrastructure spending, and optimism in business sentiments. However, headwinds from geopolitical tensions, volatility in international commodity prices, and geoeconomic fragmentation pose risks to the outlook.
We anticipate a shallow rate-cut cycle of 50-75 bps in FY25. The current growth-inflation dynamics favor shifting to a neutral policy stance in the August 2024 meeting. A normal or above-normal monsoon is expected to ease food inflation. Meanwhile, a slowdown in private consumption may impact growth and potentially undermine the revival in private capital expenditure. Adopting a neutral policy stance will allow the RBI to respond swiftly with a rate cut if warranted by the data.
