Opinion
RBI could signal scope for rate cuts in 2024-25
Summary
- An early policy pivot is unlikely under near-term price pressures, but a shift in policy stance to ‘neutral’ could set the stage for rate cuts next year—ideally in sync with a private investment revival.
Tighter fiscal control than expected by the government has given India’s central bank one less reason to worry as it meets this week to review monetary policy. With the Centre’s deficit projected to move faster down its glide path, the likelihood of spending-driven price pressures upsetting the Reserve Bank of India’s (RBI) apple-cart has fallen a bit. The budget has pegged the central deficit in 2023-24 at 5.8% of GDP, lower than estimated initially. Further tightening to 5.1% has been pencilled in for 2024-25, before it is shrunk to under 4.5% the following year. Looser purse strings could have made RBI wary of a premature policy pivot. But with state spending kept in better check, the central bank would be assured of a fiscal policy favourable to its job.
That said, retail inflation climbing to 5.7% in December will keep RBI’s gaze fixed on price stability, the mandate it must meet to score a key credibility win. Given its commitment to Arjuna-like accuracy, it would need price escalation held at—or around—4% year-on-year for a stretch. This means borrowers must display patience and not expect an imminent easing of monetary policy. What the budget plan could advance, however, is a much-awaited shift in stance from “withdrawal of accommodation," a reference to pandemic-time easing, to “neutral." Should RBI’s latest data readings prompt confidence that its efforts since mid-2022 have given it a handle on price levels (note that core inflation has been easing), then such a switch is within the realm of possibility this week. If done, it would raise anticipation of policy rate cuts at some point in 2024-25, as it would formalize inflation as a receding threat and economic growth as an equal consideration. Of course, this would depend on RBI’s assessment of inflationary factors. Crude oil, for one. While US hydrocarbon supply has helped keep global prices stable, a flare-up due to the crisis in West Asia can’t be ruled out. Prices are back above $80 per barrel and even the budget math could get hit by a lasting upshoot. Meanwhile, food prices remain subject to volatility. So core inflation—shorn of fuel and food, i.e.—having eased is incomplete comfort. What RBI’s policy panel might opt for, then, is inflation-fighting accuracy as a priority over risking a lost chance of achieving 4%. Hasty easing could undo a year-and-a-half’s deployment of various tools. Perhaps RBI can draw comfort from the US Fed’s apparent wait for confidence in achieving its 2% target before it eases credit in America. Given how the Fed-funds rate affects capital flows, a measure of synchrony is useful in tightening cycles, but less so the other way round.
What makes space for an Arjuna-worthy shot at 4% by RBI is the Indian economy’s brisk pace of expansion. Several forecasts suggest that 7%-plus real GDP growth is sustainable, even though global headwinds persist and geopolitics can deliver shocks. In an ideal scenario, price stability would be achieved sooner than current forecasts indicate, letting RBI calibrate its actions in sync with—and in support of—a revival in private investment that the Centre is optimistic could occur in 2024-25. With the Indian state as our big investor, rate sensitivity is not an issue, but for private players to dust off plans and invest in expansionary projects, real capital costs would have to be kept low on a base of price stability (and expectations thereof). This week’s big question, though, is whether RBI deems its covid-easing reversal finally over and done with. Is it time, i.e., to go neutral?
