RBI to keep status quo on key rates this week

Shanti Ekambaram writes on Budget 2025

“This is the best macro set up we have seen in many years,” said the Reserve Bank of India (RBI) Governor Shaktikanta Das recently, exuding both pride and optimism over the Indian economy’s outlook. He also mentioned that the central bank was playing “ball by ball” – a reference to a close watch on data prints on inflation, growth and liquidity to ensure a stable financial and monetary policy.

As the central bank’s Monetary Policy Committee meets in early June to take a fresh look at the key policy rates, we may expect a status-quo – for the eighth time in a row –as the road to lower inflation in the economy, especially at the retail level, continues to take longer than the expected time frame. The latest retail inflation number in April at 4.8 percent may have moderated from the earlier month, but it is far from the central bank’s
target – around 4 percent.

Meanwhile, the Indian economy continues to show resilience, and has grown at a whopping 8.2 percent in the fiscal year ended March 31, 2024, as against the best estimate of 7.6 percent. This should be comforting to the RBI as its resolute fight against inflation is not denting the economy, unlike in many other countries.

This buoyant economic data also comes closer to the announcement by the RBI to transfer Rs 2.11 trillion as dividend to the central government for 2023-24 - more than double the amount that it had paid for 2022-23. This will help the government manage the fiscal deficit at a lower than budgeted level and also give headroom for further thrust on Capex, which will keep
the economic growth engine going.

Given the solid economic growth, the central bank will watch the data closely as it could stoke demand driven inflation in addition to risks to inflation on account of climate changes. On the other hand, the record dividend payout by the RBI will bridge the government’s fiscal deficit gap by an estimated 0.2 percent, which has already resulted in softening of the bond yields. Anticipations are high that government borrowing in this financial year will be lower than the last year, thereby reducing the debt supply pressure.

India is entering what is widely predicted to be a normal monsoon season, and it remains to be seen how the rains are spread across the country in coming weeks and months. The importance of farm output cannot be emphasised enough in an agriculture-intense economy like ours.  Some respite can be drawn from the fact that the monsoon set over Kerala last week, two days ahead of its normal date, and has advanced into most parts of North-East India, according to the India Meteorological Department (IMD). The onset of the monsoon indicates the start of the South-West
rainfall season, from June to September, and accounts for nearly three-quarters of the annual rainfall.

However, unusual heat wave conditions seen in the north are a cause for concern as they will have a bearing on the supply-wide factors and therefore, can keep the food prices elevated. Food inflation surged to 7 percent in FY24, up from 6.7 percent in the year before. The present conditions are weighed towards a  price increase, leaving little choice for the central bank . Thus, the RBI’s bias is likely to be cautious given upside risk from inflation despite an early monsoon.

External factors, too, point at a wait-and-watch approach. The on-going geopolitical skirmishes in Europe and the Middle East are not showing any indications of receding.

That means a volatility in the crude oil prices, which is critical for an import-oriented country like India, is likely to continue in the immediate future. At the same time, the global central banks beginning with the US Federal Reserve have, in their most recent commentary, indicated that rate cuts may take longer than anticipated earlier. US FED actions will be closely watched for any action on the rate front.

Another factor is that the RBI may consider it prudent to decide the direction of monetary policy course only after the government, which is voted back to power, presents a full Budget upon assuming office. Such an action would be in greater harmony – in drafting the course of action – for each of them and for the benefit of the Indian economy. For the moment, the RBI is likely waiting to see how many of these
factors at hand would play out before taking any key decisions.

So, it is status quo for now and wait for change in stance ahead of any rate cut action.

(Author is Deputy Managing Director, Kotak Mahindra Bank)