The Reserve Bank of India (RBI) has a dual mandate. While easing inflation makes a case for lower interest rates, robust growth momentum provides room to the central bank's Monetary Policy Committee (MPC) to stay vigilant and err on the side of caution. After all, headline retail inflation has been above the medium-term target of 4 percent for more than four years now.
But more than just the growth and inflation mix, globally, there is an air of uncertainty that clouds policymakers' view of the near future.
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After reducing the policy repo rate step by step ahead of the coronavirus pandemic to deal with a growth slowdown, the RBI had to effect huge cuts in early 2020 to offer support as the economy came to a standstill.
Two years of status quo followed until the MPC could no longer ignore the perils of elevated inflation and 250 basis points of rate hikes were announced in 2022-23. This year, then, has been about letting those rate cuts filter through.
"The macro environment of resilient growth and anchored core inflation amid food inflation risks is setting the stage for an extended pause by the RBI, in our view," Nomura economists Sonal Varma and Aurodeep Nandi noted on January 12.
"However, as inflation trends closer to 4 percent, core inflation remains anchored, and the global rate cycle pivots, the RBI is likely to shift its focus to growth and will likely be alert to the risks of overtightening."
Indeed, the word "overtightening" has already found its way into the RBI's commentary. However, as Governor Shaktikanta Das has warned, that should not be taken as a sign of future action but that hasn't stopped economists.
"With the global monetary policy backdrop turning more benign, we bring forward our rate cutting cycle, now expecting RBI to deliver interest rate reductions from April-June 2024, probably in the June MPC (meeting), with three 25 basis points rate cuts most likely to be delivered in calendar year 2024, one each quarter starting in June," Rahul Bajoria, Managing Director and Head of EM Asia (ex-China) Economics at Barclays, said.
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