‘Slow-moving elephant’ hangs over RBI pivot

The Reserve Bank of India (RBI) on Friday kept its key interest rate unchanged in a widely expected move, saying robust economic growth will give it “greater elbow room” to focus on bringing down inflation towards its medium-term target of 4%.

RBI governor Shaktikanta Das summed up the latest monetary policy stance by saying “the elephant is walking slowly and we have to be very watchful”. In the April policy, the governor had referred to inflation pain as the “elephant in the room which has left for the jungle”.

India’s retail inflation in April eased marginally to hit an 11-month low of 4.83% on an annual basis as against 4.85% in the previous month. However, the cheers that retail prices were easing was damped by concerns around rising food prices.

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However, the RBI’s decision to hold rates at 6.5% for the eighth time in a row and maintain its policy stance at ‘withdrawal of accommodation’, faced increasing dissent with two out of six members of the Monetary Policy Committee — JR Varma and Ashima Goyal — voting for a change in stance to ‘neutral’. Until April, Verma was the lone voice against the status quo in rates and policy stance.

The good news is the apex bank revised the GDP growth forecast upwards to 7.2% for the current financial year from 7% earlier, but kept its outlook on inflation unchanged at 4.5%.

“Globally, there are concerns that the last mile of disinflation might be protracted and arduous amidst continuing geopolitical conflicts, supply disruptions and commodity price volatility,” said Das.

The stock market cheered the hike in GDP forecast, with the Sensex rising over 2% or 1,619 points, to the 76,693 level

soon after the policy announcement.

The governor also countered the view that in matters of monetary policy, the RBI is guided by the principal of ‘follow the Fed’.

. “I would like to unambiguously state while we do keep a watch on whether clouds are building up or clearing out in the distance horizons, we play the game according to the local weather pitch conditions,” said Das.

Pranjul Bhandari, chief India economist, HSBC believes the governor’s statement implies that if domestic drivers like good monsoon help lower food prices, the RBI would be open to cutting rates before the Fed. “But for that, we think the RBI will have to clearly see its modelled one-year-ahead inflation forecast asymptote to 4%,” she said, adding that while the policy seems to be marginally hawkish, there are some statements that seem to have sown the seeds of looser monetary policy down the line.

However, Abheek Barua, chief economist, HDFC Bank, said any rate cut action could end up being aligned with the timing of the Fed’s rate cut cycle to limit financial market volatility.

“The RBI remains in a wait and watch mode to assess domestic developments like the monsoon performance, food inflation, and the new fiscal strategy before moving on rates, We continue to see the possibility of a rate cut in Q4 2024,” added Barua.

Bankers believe that RBI’s upwards GDP revision reflects the economy’s continued robust growth post-pandemic. Said Dinesh Khara, chairman, SBI, “Domestic growth inflation outlook has moved favourably with inflation moving below 4% in the second quarter.”

According to Zarin Daruwala, CEO, India and South Asia, Standard Chartered Bank, RBI’s ongoing focus on inflation may give it room for rate cuts in the coming months. “The repo rate was left unchanged as expected but the upward revision in the full year GDP estimate to 7.2% was encouraging,” said Daruwala.

HSBC’s Bhandari also added that three factors — monsoon, Budget and neutral rates will decide the future of rate cuts. If all these three align, there could be some easing. “RBI aims to announce its updated assessment of real neutral rates shortly. If it’s a gentle rise (from say 1% as per RBI’s previous assessment to 1.5%), there could be space for 25-50 bp easing, but if it is a doubling of neutral rates, then there may not be much room for rate cuts,” she added.

India’s economy remains resilient, Das said, adding he expects manufacturing activity to gain ground and consumption recover. Rural demand is also being aided by a pick-up in farm activity.

Investment activity is likely to stay on track, with high capacity utilisation, balance sheets of banks and corporates are healthy and the government will keep up infrastructure spending, the MPC said in its written outlook.

Among other measures, RBI has increased the bulk deposit limit from `2 crore to `3 crore for banks. It has also proposed to set up a digital payments intelligence platform that will do real-time data sharing across the digital payments’ ecosystem.

The central bank is also assessing whether further measures are needed to slow down the growth in banks’ lending towards unsecured loans and non-banking finance companies (NBFC). “Recent data suggests that there is some moderation in these loans and advances,” Das said, while announcing the interest rate decision. “We are closely monitoring the incoming data to ascertain if further measures are necessary.”

Das also urged the boards and top management of regulated entities to ensure that risk limits and exposures for each line of business are kept “well within their respective risk appetite framework”.