RBI Shift in Stance: Signalling cautious optimism

“With a lot of effort, the inflation horse has been brought to the stable” is how the Reserve Bank of India (RBI) Governor described their consistent effort, over the last few years, to tame inflation and bring it closer to its tolerance band. Though the policy rates were kept unchanged today, the optimism was evident on the inflation management as the policy stance was changed to “neutral” and the GDP growth was retained at 7.2 percent for FY25, belying a lot of market commentary on growth numbers trending lower to ~7 percent.

The oft repeated statement in the Governor’s commentary was, “unambiguously focussed on durable alignment of inflation with target, while supporting growth”, signalling clearly, “that the horse has to be kept on a tight leash”, and hence any rate cut in the December policy review will clearly be driven by conviction around the inflation trajectory trending downwards (while acknowledging a higher marker for Q3 due to base effect). However, the chances of a small cut in December do get thrown up, considering that some of the markers around India’s growth story remain intact; with private investment & consumption as well as government capex expected to pick up in H2, a stronger kharif output and rabi sowing due to a good monsoon lending to a pick-up in rural demand, and a resilient current account deficit and forex position keeping the INR steady.

In fact, the RBI retaining their GDP growth projection of 7.2 percent for this FY and a much stronger 7.4 percent growth footprint for H2 seems to be coming from the expectation of a stable inflation complementing growth in private consumption, an improved outlook to agricultural output and rural demand on the back of a good monsoon, services sector buoyancy supporting a better urban demand, an increased capex spending by the Centre and States, and a higher private sector investment backed by healthy balance sheets of corporates and banks and a stable currency.