The April MPC meeting minutes reflect RBI’s comfort on favourable domestic dynamics, while concerns remained around the possibility of food price spikes. Even though domestic conditions are comfortable, global dynamics are set to play a major role in the RBI’s reaction function. Analysts maintain that the central bank will not precede the Fed in any policy reversal in CY24 but policy management will have to stay vigilant. Concerns around the possibility of upcoming food price shocks due to adverse weather and a need to durably anchor inflation expectations and the healthy domestic growth trajectory meant that a majority of MPC members continued to back a pause in rate action as well as status quo on the stance. Most of the MPC members, including RBI Governor Shaktikanta Das, emphasised on anchoring inflation expectations decisively and maintaining financial stability.
Dr. Ranjan said that market expectations of early DM rate cuts have seen significant and rapid repricing due to incoming data, which has added uncertainty and volatility to the market. Dr. Goyal explicitly ruled out providing forward guidance for rates by citing the example of the US. Further, even if price shocks from food or commodities were to materialize, this would allow the pass-through of such shocks to be lower. Additionally, both Dr. Patra and Das stated that while inflation expectations are getting anchored, achieving this on a durable basis was crucial to achieve the inflation target. Dr. Patra also mentioned that financial stability risks in India need to be continuously monitored and pre-emptively tackled despite improving growth trends. Thus, RBI does not want to introduce unnecessary volatility in the market, especially during a phase of global geopolitical uncertainty, and therefore rates are likely to be on hold for quite a while going forward. There were a couple of comments on real interest rates but with differing inferences.
Prof. Varma’s dissent was largely based on the fact that current real policy rates of two per cent are excessive, and that a real rate of 1-1.5 per cent should be sufficient to bring inflation down to target without sacrificing growth. Dr. Goyal stated that real rates are currently higher than the neutral rate, but this is not a concern at present since growth remains strong and investment is rising along with the robust credit growth. She also opined that maintaining stability is a priority at this juncture as justification for holding rates steady. With only Prof. Varma speaking about slower growth projections for FY25 versus FY24, it is clear that MPC’s focus is on inflation rather than growth at present, in terms of domestic factors. However, Emkay Global maintains that global dynamics will continue to play a major role in RBI’s reaction function, especially with a comfortable domestic macro environment. So, RBI may not precede the Fed in any policy reversal in CY24 but food price hike will continue to have its impact on rate hikes.