The decision taken in any policy is the repo rate, followed by the stance. Yet, there are several expectations as the narrative, though quite stylized, is open to interpretation by market players. Hence, a status quo on rates and stance does not mean it is a non-event.
The projection of GDP growth is important because it indicates what future actions could be. The inflation projection tells us what the members could do in case they hold true. And above all, one tries to read between the lines to figure out if the MPC is cautious, hawkish or plain dovish. These terms are subjective and interpreted based on the reviewer's proclivities.
Against this background, how does one view this credit policy? The repo rate was not expected to change as the current data shows stable growth indicated by the high- frequency indicators. Inflation, though rising, is not worrisome, even though the future is open to cynicism. Therefore, a status quo appears to be a non-surprise.
The concept of stance has always been nebulous, and "neutral" was a way of saying that anything could happen in the future. Today it is accepted that the stance does not need to change before there is rate action. Hence, no change in stance may not really mean anything significant.
The two projections on GDP and inflation are significant as they justify the neutral view expressed. The GDP growth number of 6.7% indicates that things are marginally better than was earlier expected. In the June policy, there was a downward revision. 6.6% and 6.7% is not very different, yet conveys a strong message that growth is in order.
This can be linked to the high-frequency economic indicators that displayed remarkable resilience in the first quarter, when war uncertainty was at its zenith. The present takes give the idea that policy need not really be geared more towards protecting growth, which is stable.
Inflation is the main target for the MPC, and here there are clearly conflicting patterns. Current inflation is rising but not worrisome, as it remains below 5%. But inflation is expected to rise along the way. This is also borne out by the forecasts for the following quarters.
There is comfort in Q1 inflation, which came in lower at 3.9% against the RBI projection of 4.2%. But the next three quarters will witness rising inflation. Now the RBI’s projection for the year is down again very marginally to 5% due to this downward revision. But this lowering of the forecast is symbolic of inflation not being a worry today. Also, the statement reiterates, on more than one occasion, that inflation is largely on the supply side and that core inflation is stable, and even lower, if we exclude gold. This probably shows there is no urgency to take rate action.
Now, the main issue is at what stage inflation will be considered uncomfortable. Average inflation since 2014-15 has been 4.8%, and 5% if 2025-26 is excluded, when it came very low. This means that as long as inflation is in the range of 5-6%, nothing untoward is happening. Will this be a reason to increase the repo rate? When we were in the rising-interest part of the cycle, inflation averaged around 5.6%. In that case, will this become the threshold for policy action?
This part is debatable. Also, the forecasts for Q3 and Q4 of FY26 and Q1 of FY17 are on the higher side, above 5%, with Q3 at 5.9%. This will mean the real interest rate will be negative for 3 months at 5.25% repo rate.
So, what final direction can be deduced from this policy? The first is that there could be good chances of a repo rate hike in future, with the caveat that it would be data-dependent. More likely in December. The OIS (Overnight Index Swap) market indicates one hike this year. At any rate, there are no chances of a rate cut, which means that the rate cut cycle is behind us.
Second, growth appears to be on the right track, and the economy has withstood the impact of the war quite well. Third, the forex position per se will be improving further in the coming months, and the balance of payments will be positive.
Lastly, there has been no specific mention of the quantum of FCNR (Foreign Currency Non-Resident) deposits and the accompanying liquidity that would flow in. But for sure, liquidity will become much easier, and instead of having a problem of deficits in the system, there could be one of surpluses that will merit attention.
The author is chief economist, Bank of Baroda and author of: Corporate Quirks: The darker side of the sun. Views are personal.