MPC keeps rates unchanged, cautious of inflation amid firm growth

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept policy rates unchanged for the eighth straight time in today’s meeting. Amid domestic economic growth exceeding expectations, the MPC remains focused on inflation risks and any external shocks. The committee also maintained its stance of ‘withdrawal of accommodation’.

Owing to strong economic growth momentum, the MPC has the policy space to keep rates high for longer to rein in Consumer Price Index (CPI)-based inflation to its stated goal of ~4%. It expects the last stage of disinflation to be slow amid strong economic growth. Hence, the MPC is in the league of majority of central banks that have opted to keep rates unchanged in the first half of this year.

We now see the RBI cutting rates starting October 2024 at the earliest, and have lowered our expectation to two rate cuts this fiscal against three foreseen earlier. The expectation of an above-normal monsoon this year paves the way for cooling of inflation, though its distribution will be monitored over the next three months. Moderation in economic growth may also cap inflationary pressures. That said, any weather and geopolitical shocks will remain monitorables.

Highlights from June monetary policy review

• The MPC voted to keep policy rates unchanged. However, the members in favour of this pause reduced to four from five earlier, with two members voting for a rate cut
• The repo rate remains at 6.50%, standing deposit facility at 6.25% and marginal standing facility at 6.75%
• There was also status quo on ‘withdrawal of accommodation’ stance, with a 4-2 majority vote vs. 5-1 previously
• The MPC retained its forecasts for CPI-based inflation at 4.5%, as the previous meeting
• Gross domestic product (GDP) growth was revised up 20 basis points (bps) to 7.2% for this fiscal