The Reserve Bank of India (RBI) is expected to diverge from global central banks by maintaining its policy stance well into late FY25, according to a report from SBI Capital Markets.
The report, titled 'EcoCapsule', highlights that while global central banks are moving towards rate cuts, India's real growth outlook for FY25 remains stable at 7 per cent year-on-year.
In its August 8 meeting, the RBI's Monetary Policy Committee (MPC) kept the benchmark repo rate unchanged at 6.5 per cent due to concerns about inflation.
However, external MPC members Dr Ashima Goyal and Prof Jayanth R. Varma voted for a 25-basis-point rate cut and a shift to a neutral stance. The other four members voted to maintain the status quo, marking the ninth consecutive time the rate has remained unchanged.
How the RBI stands apart?
The SBI Caps report noted that external MPC members have expressed concerns that high real interest rates could unnecessarily slow the economy. They called for supply-side measures to manage food inflation and boost growth. The report projects India’s nominal GDP growth at approximately 10.5 per cent year-on-year for FY25.
Increased government spending has resulted in a banking liquidity surplus, the highest in over a year. The RBI has managed this through open market operations (OMOs) and variable rate reverse repo (VRRR) auctions. The central bank also observed sustained deposit growth, despite the volatility in late June.
Globally, early indicators suggest a downturn in the US economy, with rising jobless claims and slowing housing sales. China faces challenges with its industrial sector and ineffective housing stimulus measures. Meanwhile, inflation has eased, with crude oil prices falling due to reduced demand.
This shift towards easing monetary policy is seen worldwide, with US Federal Reserve Chair Jerome Powell signalling a potential rate cut in September 2024. The market is now anticipating about 100 basis points of cuts in 2024. The European Central Bank (ECB) and Bank of England (BoE) are also expected to follow suit.
RBI's current monetary policy stance
The RBI's rate-setting panel stated that monetary policy must remain disinflationary until inflation aligns with the central bank’s target. It highlighted concerns over elevated food prices, which could spill over into core inflation.
The MPC expects domestic growth to remain robust, driven by investment demand, steady urban consumption, and rising rural consumption. While core inflation may be stabilising, adverse climate events and volatile crude oil prices remain risks.
The RBI has projected India’s real gross domestic product (GDP) growth for 2024-25 at 7.2 per cent, with quarterly growth estimates of 7.2 per cent in Q2, 7.3 per cent in Q3, and 7.2 per cent in Q4. Retail inflation is projected at 4.5 per cent for FY25, with 4.4 per cent in Q2, 4.7 per cent in Q3, and 4.3 per cent in Q4.
Market forecasts for RBI policy
Elara Securities, a domestic brokerage, expects the RBI to maintain its current stance throughout 2024, citing risks to headline inflation due to volatile food prices. The brokerage forecasts the first rate cut in Q1 of calendar year 2025 or Q4 of fiscal year 2025.
SBI Caps projects India's consumer price index (CPI) inflation to average around 4.7 per cent in FY25, with the government’s fiscal deficit expected to be around 8 per cent of GDP. The report also predicts that the yield on 10-year government securities will remain below 7 per cent in the coming months.
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