RBI Policy: No forward guidance again from Governor Das, but clues remain

According to Governor Shaktikanta Das, it would be a mistake for people to think the RBI is giving “any kind of a signal”.

For an interest rate decision that could be seen coming a mile away, the Reserve Bank of India (RBI) had plenty to say on December 8. And while much of it was about how nothing could be said about the future course of monetary policy, a little bit seems to have crept past the Indian central bank.

First and foremost, just as the Monetary Policy Committee (MPC) was unanimous in its decision to leave the repo rate unchanged at 6.5 percent, central bank watchers were also clear that the RBI has become less hawkish since October, making the policy review "an anti-climax of sorts," according to Aurodeep Nandi, Nomura's India economist.

"In the run-up, there was considerable market uncertainty on the extent of hawkishness that the RBI would exude, particularly given the focus on tighter liquidity in the past two meetings. Instead, the RBI surprised markets by choosing to not reprise its previous hawkishness, especially through the liquidity route," Nandi added.

Indeed, Governor Shaktikanta Das said in his statement that the need to conduct open market operation (OMO) sale of government bonds – to suck out excess liquidity from the banking system – that he had mentioned in October had yet to arise as conditions had tightened due to factors beyond the RBI's control.

And while the governor was able to return the loose OMO cat back to the bag, his calculated decision to mention that policymakers have to be "mindful of the risk of overtightening" may have gone astray, with economists immediately latching on to it as a sign of balance and maybe even the stance of policy being changed soon.

Das did clarify that "it would be a mistake to read that we are giving any kind of a signal, that we are moving towards neutral" – especially given that headline retail inflation is expected to rise to almost 6 percent in November. But the RBI's forecasts are not completely on his side.

4% ahoy!

According to the RBI's latest forecasts, Consumer Price Index (CPI) inflation is finally seen averaging 4 percent in July-September 2024, meaning that it would hit the medium-term target after almost five years. CPI inflation was last at the target rate in September 2019, when it had come in at 3.99 percent.

Also Read: One year gone, one more to go on RBI's post-failure path to 4% inflation

The central bank's pursuit of 4 percent inflation assumed greater significance after it failed to meet its mandate in 2022, following which it had to submit a report to the central government detailing the reasons for the failure, the remedial actions it proposed to take, and an estimate of the period within which inflation would return to 4 percent on a durable basis. The key phrase here is 'durable basis,' which Das repeated today.

"Reaching 4 percent should not just be a one-off event… The MPC should have confidence that, yes, 4 percent has now become durable," the governor said.

As it turns out, after falling to 4 percent in July-September 2024, the RBI sees CPI inflation rising to 4.7 percent in the subsequent quarter. And we know that more than one-quarter of inflation forecasts of 4 percent or close to 4 percent is needed to nudge the MPC into easing financial conditions.

"Thus, it may be safe to say, and keeping in mind the credibility of the central banker, there is unlikely to be any chance of a rate cut till that time, unless, of course, something dramatically changes," said Indranil Pan, YES Bank's chief economist.

Regarding rate cuts, the question is when, and not if. According to Debopam Chaudhuri, chief economist at Piramal Enterprises, this could begin as early as the first quarter of 2024. The consensus, though, is closer to the middle of the next calendar year. A smaller number see the window of opportunity appearing only in the last quarter of 2024.

For all the uncertainty, the sands of Indian monetary policy have been rather very clearly defined. Last year, FY23, was the year of the great rate hike cycle, as the MPC rapidly raised the repo rate by 250 basis points to 6.5 percent. The current, FY24, has so far seen the rate-setting panel stay pat. The next, FY25, looks set to be about the reduction in interest rates.