In a recent Monetary Policy Committee (MPC) meeting, the Reserve Bank of India (RBI) unanimously decided to keep the policy interest rate unchanged, with one member voting for a rate cut by 25 basis points. The central bank also maintained its stance, signaling a “withdrawal of accommodation.”
The decision aligns with the current economic landscape, characterized by robust growth surpassing expectations and well-contained inflation dynamics. Despite a decline in core inflation below the 4% mark, the RBI emphasized its focus on food inflation, citing concerns that recurring food price shocks could disrupt the ongoing disinflation process.
With India positioned favorably in terms of high growth and controlled inflation, market expectations for a shift in the RBI’s stance to “neutral” were not met. The central bank remains committed to its inflation target of 4%, and with the credibility of the RBI considered crucial, there seemed to be little room for a change in either the policy rate or stance.
The market’s anticipation centered on liquidity measures and any indication of dovishness in the RBI’s commentary. The Liquidity Adjustment Facility (LAF) reported an average deficit of INR 2.1 trillion in January 2024, primarily attributed to reduced government spending and increased Currency in Circulation (CIC). While liquidity management strategies were implemented by the RBI, concerns lingered over the potential impact on policy direction.
RBI officials clarified during a press conference that liquidity operations and stance are distinct matters. Liquidity operations aim to maintain an operative rate close to the target rate, while the stance signals the future direction of policy. The RBI’s emphasis on full transmission of previous policy actions to the lending side has diverted attention from discussions on the real interest rate, currently estimated at around 180 basis points.
Despite the “higher for longer” narrative prevailing, the RBI’s potential to cut rates may only materialize around the August 2024 policy. However, some risks are emerging, indicating a potential delay even to this timeline. The central bank’s cautious approach reflects its commitment to navigating the complex interplay between growth and inflation dynamics while ensuring a stable and conducive economic environment.