The Reserve Bank of India held rates steady in December, with a cautious outlook suggesting a potential 25bps cut in Q4 FY2024/25 amid projected growth recovery and inflation concerns.
Key View
- The Reserve Bank of India stood pat in its December meeting, as we expected.
- While the accompanying statement sounded hawkish, we think another quarter of soft growth in Q3 FY2024/25 (April-March) will prompt the Bank to cut by 25bps in Q4 FY2024/25.
- We still expect the Bank to take a cautious approach to easing in FY2025/26 and forecast 50bps in cuts over that year.
The policy board of the Reserve Bank of India (RBI) voted 4-2 to leave monetary policy settings unchanged in its December meeting, as we and 62 out of 67 economists polled by Reuters had expected. The policy board also maintained a neutral stance on monetary policy.
Governor Shaktikanta Das’s remarks were hawkish in our view. While he acknowledged the sharp drop in GDP growth in Q2 FY2024/25 (April-March) he downplayed the slowdown, describing it as an ‘aberration’. And the Bank expects growth to recover to 6.8% in Q3 FY2024/25 and further to 7.2% by the final quarter. Instead, Governor Das stressed the importance of bringing inflation back down to target, opining that it is vital to ensure steady economic growth. It is also worth noting that while the RBI’s mean expectation is for headline inflation to fall to 4.5% y-o-y, its large forecast range suggests inflation could even rise to around 7% instead.
Outlook For Next Meeting
We have some sympathy for the Bank’s hawkish tone. If anything, the Bank’s mean inflation forecast may be too optimistic – we think inflation will probably stay close to the Bank’s 6% target upper-bound through the rest of FY2024/25 (see chart below).
The Reserve Bank of India (RBI) has consistently adopted a cautious approach to monetary policy, prioritizing economic stability amid fluctuating global dynamics. As inflationary pressures and uncertainty continue to loom, the central bank is likely to maintain this prudence. This strategy not only addresses immediate economic challenges but also lays the groundwork for sustainable growth in the long term.
In recent months, various indicators have signaled a need for careful monitoring. While some sectors exhibit resilience, others face headwinds, including rising commodity prices and geopolitical tensions. The RBI is tasked with balancing the need for growth with the imperative to control inflation. Its commitment to vigilance is crucial as it navigates through these complexities, ensuring that policy measures are both timely and effective.
Ultimately, the RBI’s cautious stance is a reflection of its dedication to safeguarding the Indian economy. By prioritizing stability and methodical decision-making, the central bank seeks to inspire confidence among investors and the public, fostering an environment conducive to growth while mitigating risks.
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