Anticipating the comments that would follow the Monetary Policy Committee's decision to leave the repo rate unchanged at 6.5 percent and remain focused on withdrawal of accommodation, Reserve Bank of India Governor Shaktikanta Das said early on in his address that the October 6 announcement was a "status quo policy" only to the extent of the interest rate and stance.
Das was right. The central bank has made it abundantly clear that it will not take any chances when it comes to inflation, with the governor closing his address by "emphatically" reiterating that the RBI's inflation target is 4 percent, and not a 2-6 percent range. And this, combined with the RBI's clear intention to keep a tight grip on liquidity, is pushing back rate-cut calls even further.
Also Read: RBI retains GDP growth forecast of 6.5% for FY24 and FY25
"We think any consideration of a pivot towards monetary easing has been pushed to the second half of 2024," said Rahul Bajoria, head of EM Asia (ex-China) Economics for Barclays, adding that he expects the rate-cut window to open only in July-September 2024.
When asked for clues, the RBI continues to point to its inflation forecasts, although it refuses to interpret them.
"A tendency of the inflation numbers to move towards 4 percent is what we are looking for," Deputy Governor Michael Patra told reporters in the post-policy press conference.
The RBI's largely unchanged forecasts give little away, with Consumer Price Index inflation expected to average 5.2 percent in the last quarter of 2023-24 and 4.3 percent in the last quarter of 2024-25.
More cautious
Even though the inflation forecasts have barely changed from August, the central bank has become more worried about the outlook. According to Sunil Kumar Sinha and Paras Jasrai of India Ratings, frequent disruptions to attempts to lower CPI inflation to the medium-term target of 4 percent have made the RBI "more cautious in its approach towards the conduct of monetary policy".
"As RBI is projecting even April-June 2024 CPI inflation at 5.2 percent and real GDP growth at 6.6 percent, it looks like we may have to brace for a long pause on repo rate," Sinha and Jasrai noted.
Headline retail inflation will, in all likelihood, complete four years above the medium-term target of 4 percent when CPI data for September is released on October 12. While the RBI's latest forecast implies inflation may have slowed to as low as 4.8-4.9 percent in September, economists from outside the RBI are predicting a higher number of about 5.3 percent.
This is not to say that a surprise is out of the question. As pointed out by Piramal Group chief economist Debopam Chaudhuri, the longest period for which the repo rate was kept on pause prior to a cut was 12 months, in 2014. Then governor Raghuram Rajan delivered a surprise 25-basis-point cut in mid-January 2015, outside the policy schedule.
"A similar event cannot be ruled out this time, especially if the impact of food prices from lower kharif acreage does not impact the RBI's forecast for overall inflation during the rest of 2023-24," Chaudhuri added.
The MPC hasn't changed the policy repo rate since February – or eight months.
Grip on financial conditions
With the government's bond issuances, on a net basis, falling sharply in the second half of the year and foreign inflows in sovereign debt set to pick up even before India is formally included in JPMorgan's global indices in June 2024, hopes were that bond yields would come down markedly. Instead, the RBI said it will likely conduct open market sales of government securities to manage liquidity, sending yields more than 10 basis points higher in the secondary market.
Clearly, the incremental cash reserve ratio of 10 percent – which will be phased out entirely from October 7 – was only the trailer of the RBI's liquidity film.
"It is clear, to our mind, that the RBI will not let financial conditions loose anytime soon," said Nikhil Gupta, Motilal Oswal Financial Service's chief economist.
Indeed, unless there is an unexpected surprise – or shock – the RBI seems to have strapped in for an even longer haul than initially anticipated.
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