The Reserve Bank of India’s (RBI) first Monetary Policy Committee (MPC) meeting for FY25 commenced on Wednesday, April 3, 2024. Experts anticipate that the RBI will maintain the repo rate at 6.5% for the seventh consecutive time, given strong macroeconomic indicators. All eyes are on the economic projections by RBI Governor Shaktikanta Das, which will be revealed on the concluding day of the RBI MPC meeting on Friday, April 5.
According to a poll conducted by Reuters, a majority of economists believe that the Indian central bank may keep rates steady until at least July, a bit longer than the US Federal Reserve is expected to do so.
India’s GDP numbers for the October-December quarter of FY24 exceeded expectations, and moderating inflation suggests that the RBI will likely keep interest rates unchanged this time as well.
The Indian economy grew impressively at 8.4% in the fourth quarter of 2023, the fastest among major economies. Meanwhile, inflation, which is still close to the upper band of the central bank’s 2%-6% target, does not hint at an imminent rate cut.
The US Federal Reserve embarked on an aggressive rate hike spree in 2022 to control soaring inflation amidst the Ukraine-Russia war, which resulted in a sharp surge in commodity prices. In India, the RBI last hiked the repo rate to 6.5% in February 2023.
Due to the Fed’s more aggressive policy stance, the policy rate differential between India and the US stands at 100 basis points, considerably lower than historical levels.
While the Federal Reserve has already hinted that it may slash policy rates in the coming months, the growth and inflation dynamics in India indicate that the RBI may remain hawkish and keep rates elevated for longer than that in its commitment to cool down headline retail inflation to the MPC’s mid-term target. The RBI has been mandated by the government to keep inflation at 4% with a comfort band of 2% on both sides.
India’s retail inflation has remained within the RBI‘s comfort zone of below 6% in recent months. Core inflation eased to 3.34% in February compared to 3.59% in January. Headline CPI inflation stood at 5.09% in February against 5.1% in January.
While the central bank is expected to maintain its FY25 CPI projection unchanged at 4.5%, it could raise the GDP growth forecast to around 7.5% from an earlier estimate of 7%. Last week, Finance Minister Nirmala Sitharaman said that India’s GDP is well on track to grow at 8% or more in the January-March quarter.
