RBI prioritises inflation over growth; rate cut likely by Dec, say experts

In line with Street expectations, the Reserve Bank of India (RBI) in its August monetary policy committee (MPC) meeting once again opted to hold the policy rates and stance for the 9th straight time on the trot. The RBI Governor Shaktikanta Das-led six members MPC kept the benchmark repo rates unchanged at 6.5%, standing deposit facility (SDF) at 6.25%, and marginal standing facility (MSF) rate and bank rate at 6.75%. It has decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. It has kept its inflation projection for FY25 at 4.5%, with Q2 at 4.4%, Q3 at 4.7%, Q4 at 4.3%, and Q1 FY26 at 4.4%. 

According to industry experts, the RBI continued to prioritise inflation over growth, waiting for clues from the U.S. Federal Reserve, before acting. They expect changes in the policy stance in the October meeting, scheduled on October 7-9, with rate cuts beginning from December. The trajectory of domestic food inflation and the evolving path of the Fed rate will be the key monitorables in the near-term.

The U.S. Fed Chair Jerome Powell-led Federal Open Market Committee (FOMC) will meet on September 17-18 to announce policy decisions, after maintaining borrowing rates steady for 12 straight months to bring down inflation in the world's largest economy.

"The RBI expectedly kept rates and stance unchanged with unambiguous focus being retained on inflation. With growth remaining robust the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend,” says Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

“We continue to expect scope for change in stance in the October policy with rate cuts beginning from December. The prospects of simultaneous change in stance and rate cuts could increase depending on how domestic inflation and global environment transitions," adds Bhardwaj.

Umeshkumar Mehta, CIO, SAMCO Mutual Fund, says that RBI MPC is in wait and watch mode and has kept the interest rates unchanged, waiting for clues from the largest central bank of the world, U.S. Federal Reserve, before acting. “Though India’s position today is far more resilient on the economic front which could have allowed a slight rate reduction to test the water on inflation and exchange rates, but the RBI has taken a safer bet and decided to wait for rate reduction by the third or the fourth quarter of this year. Stock markets will continue to consolidate in the meanwhile.”

“RBI remains focused on bringing down headline inflation within target range on a sustainable basis. We expect short-term rate curve will be driven by banking system liquidity as near-term policy rates are likely to remain in status quo mode. Current Short-term rates offer attractive avenue to investor with near-term investment horizon,” says Amit Somani, Senior Fund Manager-Fixed Income, Tata Asset Management.

“Maintaining policy rates reflects a prudent continuity in a goal based approach and seems to be in line with market expectations. With core inflation showing signs of moderation, backed by a good monsoon, we expect robust demand in the rural and semi-urban economy. Regulator's focus on bringing down inflation in a sustained manner continues to support a sustained long-term growth trajectory," says Rajendra Kumar Setia, MD and CEO, SK Finance.

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares says that  there have been concerns around restrictive rates taking a toll on domestic growth, Governor Das emphasised the need for a central bank to maintain price stability, a necessary component for sustained economic momentum.

“A key point to note is his emphasis on food inflation and the fact that MPC was willing to look through it in case it will transistory but as recent experience has suggested, food prices have remained elevated for too long and given a 46% weight in the CPI basket, this component cannot and should not be ignored,” adds Hajra.

According to Sachin Bajaj, EVP and Chief Investment Officer at Max Life Insurance, the RBI maintained status quo despite the recent events in the global markets and dovish guidance from global central bankers. “The MPC remains confident about stable growth, while the inflation outlook remains uncertain due to volatile food prices. On the backdrop of stable growth and volatile food prices, we expect the RBI to take a call on rate cuts only if it feels more confident in reaching a 4%–4.5% inflation trajectory.” 

Policymakers remain comfortable with the evolving growth trajectory and emphasised that RBI remains resolute in aligning headline inflation to the target of 4% on a durable basis, says Kapil Gupta, Executive Director- Research, Nuvama Institutional Equities.

“While core inflation is benign, the stubborn food inflation poses the risk of second round effects and there requires constant vigil. Thus, policymakers are in no rush to lower their guard as of now,” says Gupta.