A brief analysis: What message does RBI Governor Shaktikanta Das want to convey?

RBI

Unlike some of his predecessors, Reserve Bank of India (RBI) Governor Shaktikanta Das isn’t someone who would like to surprise the markets with his rate decisions.

Today wasn’t different as well. A no-surprise policy, again. As expected, the monetary policy committee (MPC), led by the RBI, retained the key lending rate, the repo rate, at 6.5 percent, making it the sixth consecutive policy review of no rate action.

More importantly, the stance on withdrawal from accommodation too was retained, indicating that the MPC is not yet ready to lower the guard against retail inflation, at least until the inflation numbers comfortably align with the medium-term target of 4 percent.

A shift in stance to ‘neutral’ would have indicated the thinking within the central bank towards a rate cut in the near term. That hasn’t happened yet. A lot will depend on inflation numbers in the months ahead. The central bank wants inflation to come down to the 4 percent level on a sustainable basis.

If one reads between the lines, there is a sense that the MPC has probably come to the end of the current rate hike cycle and is awaiting final cues in terms of inflation easing before taking a call on rate action. In fact, one shouldn’t be surprised to see a change in stance as early as in the April review to neutral as a prelude to rate cuts later this year. However, for now, the mood of caution against high inflation remains.

What has changed?

Between the last policy in December and this time, what has changed? One, the government presented a budget that promised a lower fiscal deficit and lower borrowing numbers. Two, the December inflation, and, more critically, core inflation (non-food, non-oil), came much lower than expectations.

These are good news for the pro-rate-cut lobby. These three factors—easing of core inflation, a critical component in the overall inflation; a lower-than-expected gross borrowing number and fiscal deficit figure; and, three, lower December inflation numbers–are positive indicators for the MPC from a policy perspective.

Will inflation ease further from this point? One needs to wait for the actual number, but it looks so at this point. The December inflation number, at 5.7 percent, is lower than market expectations. The RBI has projected CPI inflation for FY24-25, at 4.5 percent, inching closer to the medium-term target, but not quite there yet.

What has changed?

Between the last policy in December and this time, what has changed? One, the government presented a budget that promised a lower fiscal deficit and lower borrowing numbers. Two, the December inflation, and, more critically, core inflation (non-food, non-oil), came much lower than expectations.

These are good news for the pro-rate-cut lobby. These three factors—easing of core inflation, a critical component in the overall inflation; a lower-than-expected gross borrowing number and fiscal deficit figure; and, three, lower December inflation numbers–are positive indicators for the MPC from a policy perspective.

Will inflation ease further from this point? One needs to wait for the actual number, but it looks so at this point. The December inflation number, at 5.7 percent, is lower than market expectations. The RBI has projected CPI inflation for FY24-25, at 4.5 percent, inching closer to the medium-term target, but not quite there yet.

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