On the road to disinflation, the last mile is the hardest

RBI governor Shaktikanta Das highlighted that the “last mile of disinflation” towards the 4% inflation target is the most challenging, signalling that rate cuts may not be imminent. (Bloomberg)
RBI governor Shaktikanta Das highlighted that the “last mile of disinflation” towards the 4% inflation target is the most challenging, signalling that rate cuts may not be imminent. (Bloomberg)

Summary

  • Five out of six committee members on Thursday voted to keep the policy repurchase rate unchanged at 6.5%, and stance unchanged at withdrawal of accommodation.

MUMBAI : The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) kept the benchmark interest rate unchanged for the sixth straight time, citing persistent risks from food inflation and incomplete transmission of monetary policy, pouring cold water on hopes of an early rate cut.

Five out of six committee members on Thursday voted to keep the policy repurchase rate unchanged at 6.5%, and stance unchanged at withdrawal of accommodation. Only Jayanth R. Varma voted in favour of a rate cut and a change in policy stance to neutral. RBI last raised the repo rate to 6.5% in February 2023, and has left it unchanged since then.

RBI governor Shaktikanta Das highlighted that the “last mile of disinflation" towards the 4% inflation target is the most challenging, signalling that rate cuts may not be imminent.

“The MPC will carefully monitor any signs of generalization of food price pressures that can fritter away the gains in easing of core inflation. Monetary policy must continue to be actively disinflationary to align inflation to the target of 4% on a durable basis. The MPC will remain resolute in this commitment. The MPC also decided to remain focused on withdrawal of accommodation to ensure fuller transmission and anchoring of inflation expectations," said Das.

The MPC marginally lowered its inflation forecasts for the fourth quarter of 2023-24 and 2024-25. Inflation is expected to come down to 4.5% in 2024-25 from 5.4% in 2023-24. It pegged the gross domestic product (GDP) growth for 2024-25 at 7%, in line with the government’s estimate.

Economists see the central bank holding off on rate cuts till the second half of 2024.

“Given the configuration of RBI’s view on inflation and growth—a Goldilocks scenario, we do not see the rate cut cycle beginning before August 2024. Moreover, the balance of risks is now tilted towards the rate cut cycle starting later rather than sooner, than we expect," said Sakshi Gupta, principal economist at HDFC Bank.

According to Madhavi Arora, lead economist at Emkay Global Research, “a stance change, thus, may wait until April or even later, and will give RBI some elbow room to understand and adjust to fluid global dynamics."

Indian benchmark bond yield rose 5 basis points (bps) after the MPC decision to close at 7.08%, while equities settled 1% lower, on concerns rate cuts could be delayed. The governor’s emphasis that the retail inflation target of 4% was yet to be achieved on a durable basis spooked rate-sensitive counters like banks and FMCG, dragging the benchmark indices lower.

Das also said the committee will be nimble in managing banking system liquidity and look at anchoring money-market rates around the repo rate. During December to January, RBI injected liquidity into the system, when liquidity deficit widened to a record 3.46 trillion on 24 January, from a deficit of 44,284.92 crore on 14 December, on account of outflows due to goods and services tax. In February, the banking system liquidity turned surplus, as government spending gathered pace, prompting the central bank to conduct six variable rate reverse repo auctions to absorb the excess liquidity.

“We continue to expect RBI to fine-tune liquidity conditions to manage the overnight (rate) to inch towards the repo rate. The change in stance could follow towards the end of 1QFY25 and subsequently shallow rate cuts starting in 2HFY25," said Upasna Bharadwaj, chief economist, Kotak Mahindra Bank.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS

Switch to the Mint app for fast and personalized news - Get App