Note Paraphrased: In the forthcoming MPC session, the RBI is projected to maintain the current key lending rates, marking the eighth successive instance, as the economy grapples with food inflation and erratic climatic conditions. The RBI’s meeting from June 5-7 will consider various factors influencing its decision-making process. The repo rate has been steady at 6.5%, reflecting the RBI’s ongoing fight against high inflation. Retail inflation, which was below 6% in April, might rise to approximately 5.49% in May, surpassing the RBI’s preferred range. Despite core inflation being kept under 6%, the RBI’s challenge lies in bringing it closer to the medium-term goal of 4%, a point repeatedly stressed as crucial in policy decisions. The current fiscal year is expected to see GDP growth exceeding 7.5%, with the RBI forecasting a further 7.4% increase next year.
Food inflation remains a concern due to unpredictable weather and supply issues. In 2023, India’s lower-than-average rainfall negatively impacted food production. However, the IMD’s forecast of an above-average monsoon offers some optimism. Despite this, the traditional link between good monsoons and stable agricultural output is no longer reliable.
The distribution and timing of rainfall, along with overall weather patterns, are increasingly affecting food prices. While normal monsoons are predicted, weather volatility suggests that food prices could remain uncertain. Government interventions to manage this volatility have limitations and cannot indefinitely stabilize prices. As a result, food prices may surge again, especially if adverse weather persists.
These factors lead to the expectation that the upcoming RBI policy meeting will not introduce immediate interest rate changes. The RBI is expected to proceed cautiously, with no significant changes foreseen for the first half of the year. The earliest rate easing might take place in the quarter starting October.
While April’s stable core inflation around 3% offers some relief to the RBI, the base effect may diminish as the year advances, potentially increasing this metric.
Globally, there is a shift towards delayed rate easing, especially by the Fed, which has opted to maintain its policy rate. Fed policymakers consider the current policy well-suited and are ready to tighten if necessary. Reaching the targeted 2% level may take longer, shifting the possibility of rate cuts in India to the third or fourth quarter of FY25.
The RBI’s surplus transfer of ₹2.21 trillion to the government for FY24, significantly higher than the budget estimate of ₹800 billion for FY25, will aid in quicker fiscal consolidation. This substantial transfer, amounting to about 0.4% of GDP, allows the government more leeway for a faster and more pronounced fiscal consolidation than initially planned in the Interim Budget for FY24-25.
The RBI’s future course will be largely determined by monsoon outcomes, food inflation trends, and global monetary policies. The central bank is poised to stay alert and postpone any major rate easing until after the monsoon, likely around the third quarter of FY25. Monitoring these factors will be crucial for the RBI’s forthcoming decisions.
