The Monetary Policy Committee (MPC) is set to convene later this week for its inaugural session of FY2025, coinciding with the Reserve Bank of India’s 90th year. As the first policy review of the fiscal year unfolds, maintaining the current rates and stance appears highly likely, alongside a cautious assessment of both inflationary pressures and geopolitical developments.
Recapping the last policy review held in early February 2024, the MPC opted for status quo on policy rates and stance, although the decision wasn’t unanimous. While one member advocated for a 25 basis points rate cut and a shift in policy stance to neutral, another member noted that the inflation forecast for FY2025 allowed room for a cut.
Economic Data Highlights
Since the previous policy meeting, domestic growth indicators have shown promising signs, while inflation outlook remains uncertain. These developments are expected to prompt a reassessment of expectations regarding future monetary policy actions.
The National Statistical Office (NSO) reported India’s GDP growth for FY2024 at a robust 7.6%, surpassing expectations. The RBI Governor’s subsequent remarks hinted at growth nearing the 8% mark for the fiscal year, leading to a consensus that the April 2024 policy review will likely maintain the status quo.
Inflation Trends
Recent inflation data has been relatively favorable, with headline CPI inflation easing to 5.1% in January-February 2024 from over 5.5% in the preceding months. Core CPI inflation also reached a series-low of 3.5% in February 2024, offering some comfort to the MPC. However, food inflation remained elevated, hovering above 7.0%.
Looking Forward
The India Meteorological Department (IMD) issued warnings of above-normal temperatures during April-June 2024, posing upside risks to perishable item inflation. Additionally, concerns about crop prices amid weak output in 2023-24 and unfavorable base effects for Q1 FY2025 could keep food inflation elevated.
A favorable monsoon, however, is expected to ease inflationary pressures, with projected CPI inflation softening to 4.6% in FY2025 from 5.3% in FY2024. Nonetheless, policy adjustments are unlikely until there is clarity on the monsoon outlook, sustained growth momentum, and the US Fed’s rate decisions. Consequently, the earliest rate cut is anticipated in the October 2024 meeting, with a limited scope for easing.
