RBI Minutes Reveal a Cautious Committee

While the MPC collectively acknowledged the resilience of the Indian economy, defying global headwinds, the minutes revealed a cautious approach, particularly regarding inflation's impact on private consumption. The committee recognised the economy's reliance on government and private investment, and urban and rural spending to prop up growth. However, the persistent grip of inflation on private consumption remains a stumbling block. In terms of concerns, the MPC noted a divergence in risks – inflation risks tilted to the upside, while risks to growth tilted to the downside. The minutes unveiled a consensus among MPC members, except Prof Jayanth Varma, that maintaining the current policy rate was appropriate. This decision aimed to sustain growth and allow the previous 250 basis points rate hike (between May 2022 to February 2023) to work through the system fully. The Reserve Bank of India (RBI) chose to maintain the main policy rate at 6.5% and continue with the withdrawal of liquidity in its MPC meeting earlier this month on February 8.  

Governor Shaktikanta Das emphasised the incomplete task of curbing inflation, warning against hasty actions that could undermine progress. He stressed the necessity for the MPC to navigate the challenging "last mile" of disinflation cautiously. The governor's cautious approach underscores the need to avoid presuming that efforts to control inflation have concluded. Meanwhile, deputy governor Dr. Michael Patra outlined the sustained momentum in domestic economic activity, driven by a shift from consumption to investment. He added that while a full private capex cycle is yet to set in and pick-up pace, other factors such as high corporate profitability, thriving housing and real estate market and the government's committment towards fiscal consolidation (as outlined in the FY25 interim budget) are expected to expedite its onset. Meanwhile, while private consumption, which drives India's growth, faces challenges from elevated food inflation. Thus Patra too, in line with Das stressed the need for restrictive monetary policy to exert downward pressure on inflation while minimising output costs. Similarly, other MPC members such as Dr. Rajiv Ranjan, Dr Ashima Goyal and Dr Shashanka Bhida reiterated that despite the output gap closing, the risk from inflation appear more pertinent and thus maintenance of status quo is prudent.  he supported maintaining the status quo, considering the delicate period of transition and the uncertainties surrounding future inflation. Prof Jayanth Varma, in contrast, questioned the necessity of the current high real interest rate, suggesting a potential for monetary easing without triggering inflation. He argued that recent policy measures and reforms should enhance the economy's potential growth rate, diminishing the risk of overheating. More specifically, he stated that the projected growth for FY25 is about 7% y/y, while the economy's growth potential is likely around 8%. Therefore, a real interest rate of 1-1.5% would be adequate to guide inflation to the 4% target, while 2% real interest rate poses the risk of turning growth pessimism into a self-fulfilling prophecy. 

While projections for FY25 allow room for rate cuts, it appears from the minutes that the RBI is likely to continue advocating a rate hold to ensure sustained movement towards the inflation target. The emphasis on cautious and nuanced approaches underscores the uncertainties surrounding both growth and inflation dynamics. In our view, despite there being headroom for a rate cut, the RBI will hold rates at least until the completion of national elections in May 2024. A small rate cut of 25bps is likely in Q2 (Jul-Sep) of FY25, followed by another in Q3-FY25 to 6% by end-2024.