The Monetary Policy Committee (MPC) meets later this week for the first time in FY2025, which marks the Reserve Bank of India’s 90th year. In the first policy review for this fiscal, status quo on the rates and stance seems to firmly be on the cards, along with a dose of caution about the inflationary as well as geo-political outlook.
To recap, the MPC had maintained status quo on the policy rates and stance in its review that was held in early-February 2024. The decision, however, was not unanimous, with one of the members voting for a rate cut of 25 bps and a change in the policy stance to neutral. Besides, the minutes of the meeting revealed that another member had highlighted that the FY2025 inflation forecast provided room for a cut.
Satisfactory Economic Data
The data releases since the last policy meeting have been quite positive on the domestic growth front, whereas the outlook for inflation remains stubbornly uncertain. Both of these are likely to lead to a recalibration of expectations around the future course of monetary policy action.
Firstly, the National Statistical Office (NSO) pegged India’s GDP growth at an unexpectedly high 7.6% in FY2024. The RBI Governor subsequently highlighted that India’s growth is likely to be closer to the 8%-mark in FY2024. This has predicated the broad consensus that the April 2024 policy review will reveal a status quo.
The recent inflation prints were quite benign, with the headline CPI inflation cooling to 5.1% each in January-February 2024 from over 5.5% in November-December 2023. Moreover, the core CPI (CPI excluding food and beverages, fuel and light, and petrol and diesel indices for vehicles) inflation dipped off to a series-low of 3.5% in February 2024, which is likely to provide some comfort to the MPC, even though inflation in the food and beverages segment remained above the 7.0% mark.
We expect the headline CPI inflation print to decline to a 10-month low of 4.7% in March 2024, amid a cut in domestic LPG cylinder and retail prices of petrol and diesel. While food inflation is expected to moderate, it is likely to persist above the 7.0% mark in the month. This would imply an average CPI inflation print of 5.0% for Q4 FY2024, in line with the MPC’s projections for that quarter.
IMD Warns of Rising Temperatures
Looking ahead, the India Meteorological Department (IMD) has recently cautioned of above-normal temperatures over most parts of the country during April-June 2024. This poses upside risks to the inflation for perishable items in the ongoing quarter, worsening the seasonal spike in such prices that is seen in the summer months. This, along with the upward pressure on prices of some crops such as pulses and rice, amid the weak output in 2023-24, and the unfavourable base for Q1 FY2025, is likely to keep food inflation elevated in the near term. However, continued softness in the prints for non-food items would keep the headline inflation print near the 5.0% mark in Q1 FY2025, before it sees a sharp base-led softening in Q2 FY2025.
Moreover, hotter than normal temperatures may affect the reservoir storage levels, which are already trailing their year ago and average historical levels. A normal and well distributed monsoon will hold the key to improved crop output and a moderation in food inflation, which will help to bolster rural and urban demand, respectively.
Monsoon to Bring Relief
Presuming a favourable monsoon, we project the average CPI inflation to soften to 4.6% in FY2025 from 5.3% in FY2024. While the IMD’s expectations of the development of La Nina conditions during the monsoon season are likely to augur well for food prices, any unpleasant surprises on the agro-climatic front could push up the food inflation trajectory and also pose the risk of food price pressures transmitting to the core segment.
While we believe that the softening in the CPI inflation in FY2025 will provide some room for monetary easing, the policy stance is unlikely to be changed before the August 2024 MPC review, until there is visibility on the monsoon turnout as well as on the sustenance of the growth momentum and some clarity on the timing and magnitude of the US Fed’s rate decisions. As a result, we foresee the earliest rate cut in the October 2024 meeting, amid a shallow rate cut cycle limited to 50 bps at best.
Aditi Nayar is Chief Economist, Head- Research & Outreach, ICRA. Views are personal, and do not represent the stand of this publication.
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