India’s central bank, as expected, has decided to keep its benchmark interest rate unchanged. The decision was made in order to prioritize controlling inflation, especially in the midst of policy uncertainty following an unexpected election result. The Monetary Policy Committee maintained the repurchase rate at 6.5% and maintained its relatively hawkish stance of “withdrawal of accommodation.” Out of the six MPC members, two voted for a rate cut, compared to one in the previous meeting. This decision comes shortly after Prime Minister Narendra Modi’s party experienced a smaller-than-expected election victory, resulting in the need to form a coalition government. This has increased the risk that the new government may deviate from its conservative fiscal path by increasing welfare spending to gain support. Such an approach could potentially lead to inflation levels that exceed the central bank’s 4% target.
However, the addition of another dissenting member in the Monetary Policy Committee (MPC) raises the possibility that the central bank may be leaning towards a rate cut. This comes after more than a year of keeping policy unchanged. The two policymakers who voted for a rate reduction were external members, Ashima Goyal and Jayanth Varma.
Despite this, most economists do not expect any easing until the final quarter of this year. They predict that the Reserve Bank of India (RBI) will likely only make a move after the US Federal Reserve changes its stance.
Anubhuti Sahay, an economist at Standard Chartered Plc, commented, “The switch in the voting pattern to 4:2 is interesting, although not entirely surprising based on the meeting minutes from the last two decisions.” She further predicted a mild rate-cutting cycle of 50 basis points between October and December.
Following the rate announcement, stocks continued to rise, with the NSE Nifty 50 Index increasing by 1.9%. The rupee also saw a slight increase, while bond markets remained relatively stable.
It is important to keep a close watch on inflation trends in the coming months.
In a live-streamed speech, Governor Shaktikanta Das indicated on Friday that the RBI may consider taking action before the Fed, emphasizing that its monetary policy decisions are based on domestic growth and inflation conditions. He stated, “While we do monitor the global economic outlook, our policy actions are primarily guided by the local conditions.” The RBI has revised its economic growth projection for the current fiscal year to 7.2% from 7%, and has maintained its inflation forecast at 4.5%. In the previous fiscal year, growth exceeded 8%, while inflation in April stood at 4.83%, slightly above the central bank’s target. According to Bloomberg Economics, this indicates the RBI’s focus on supporting economic growth while keeping inflation in check.
The key takeaway from Friday’s review was the central bank’s adherence to its hawkish position, demonstrating its independence rather than responding to the government’s request for growth support. Considering the continued hawkishness of the RBI, we believe there is now a possibility that the central bank will not initiate easing measures in August.
