India’s benchmark interest rates remain unchanged at 6.5% for the eighth consecutive time but more voices are growing within the Reserve Bank of India’s rate-setting panel for easier money.

The monetary policy committee (MPC), which met from June 5 to 7, had four members voting to keep the repo rate steady at 6.5% and policy stance at withdrawal of accommodation, while two members voted against. 

The MPC’s decision to hold on to the existing repo rate is taken with a policy position to keep check on retail inflation, with food price behaviour remaining a matter of concern.  

Jayanth R Varma and Ashima Goyal, members of the MPC outside the RBI, want a 25-basis points rate cut and a change in policy stance to neutral. The rate decisions are taken by majority vote.

RBI Governor Shaktikanta Das explained that the central bank’s actions will be decided by the domestic growth and growth outlook and not by the principle of "Follow the Fed". 

"I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," Das said.

However, Abheek Barua, chief economist at HDFC Bank, believes that the RBI’s rate cut policy will be in alignment with the timing of the US Federal Reserve’s action. “Despite the RBI Governor’s emphasis that monetary policy decisions are driven primarily by domestic considerations, we think that any rate cut action could end up being aligned with the timing of the Fed’s rate cut cycle to limit financial market volatility,” he said.

The RBI has raised India’s FY25 GDP (gross domestic product) growth projection to 7.2% as against 7% earlier. The growth surge is expected to be supported by government capex, domestic consumption and corporate profits. India’s economy expanded 8.2% in FY24.

The central bank, however, left retail inflation forecast for FY25 unchanged at 4.5%. India’s annual inflation rate eased to 4.83% in April 2024, down from 4.85% in March. Inflation, however, is still above the RBI’s target of 4%. Food inflation stayed sticky and rose to 8.7% in April from 8.52% in March.

The RBI Governor stressed that the stance has been left unchanged in order to “anchor inflation expectations” and for “fuller policy transmission”.

“Inflation is easing but final journey of disinflation might be tough,” the RBI Governor said.

The RBI’s cautious approach on the key policy rate springs from the possibility of food inflation rising as heat wave conditions prevail across the country. The central bank will await more information on spatial distribution of rainfall in the coming months.

A normal monsoon is expected this year but the MPC will weigh the conditions and assess the food inflation situation in the second half of 2024 before taking a call on monetary policy easing. 

The RBI last raised the repo rate to 6.5% in February 2023. Economists say the rate hike cycle is over but the RBI will take its time to go for a rate cut. 

Though inflation is moderating, food inflation warrants close monitoring. "While the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation. Hence, monetary policy must continue to remain disinflationary and be resolute in its commitment to aligning inflation to the target of 4% on a durable basis," Das said while announcing the policy.

Why RBI raised GDP growth forecast to 7.2%

The RBI projected GDP growth for FY25 to be at 7.2%, up from the earlier estimate of 7%. 

This revision has come on the back of sustained momentum in urban demand (passenger vehicle sales, air passenger traffic, among others), revival in rural demand (two-wheeler sales, decline in MGNREGA demand), continued improvement in investment activity (steel consumption, cement and capital goods production, government-led infrastructure development and PLI scheme investments) and robust credit growth. 

The central bank revised higher its quarterly forecast for growth, with Q1 now estimated at 7.3% (versus 7.1% in April 2024 policy), Q2 at 7.2% (6.9% earlier), Q3 at 7.3% (7% earlier) and Q4 at 7.2% (7% earlier).

Going forward, above normal monsoon is likely to support Kharif output and thus boost rural demand further.

Expansion in services sector will be driven by urban consumption. Government spending will also help investment activity.

“During 2024-25, so far, the domestic economic activity has maintained resilience. Manufacturing activity continues to gain ground on the back of strengthening domestic demand. The 8 core industries posted healthy growth in April 2024. Purchasing Managers Index, that is PMI in manufacturing, continued to exhibit strength in May 2024 and it is indeed the highest globally,” Das said.

Das said manufacturing continued to exhibit strength in May 2024 and is the highest globally. Services sector maintained buoyancy as evident from available high frequency indicators. PMI services stood strong at 60.2 in May 2024 indicating continued and robust expansion in activity.

When is RBI likely to cut repo rate

Economists and market analysts expect the RBI to introduce a rate cut only towards the end of this year. An assessment will be done based on the monsoons wile the Union Budget is expected to be presented in the Parliament in July.

“The RBI remains in a wait-and-watch mode to assess domestic developments like the monsoon performance, food inflation and the new fiscal strategy before moving on rates. We continue to see the possibility of a rate cut in Q4 2024,” said Barua.

Bank of Baroda also foresees no change in the RBI’s position before October 2024, even if monsoon is normal and supportive of food inflation. “We continue to expect earliest possible change in the RBI’s position only in the October-December 2024 period, that too if rainfall is adequate this year and inflation falls significantly below the central bank’s expectations,” said Sonal Badhan, economist at Bank of Baroda.

Goldman Sachs has also pushed its rate cut call by RBI back by one quarter to Q4 of calendar year 2024 vs Q3 (July-September), with the first cut most likely in the December 2024 meeting. In a report, Goldman Sachs said it expects a shallow easing cycle of total 50 basis points (bps) rate cuts from the RBI, with 25 bps rate cuts each in Q4 CY24 and Q1 CY25. 

Key regulatory developments:

• For scheduled commercial banks (excluding regional rural banks or RRBs) and small finance banks (SFBs), the bulk deposits limit was enhanced to “Single Rupee term deposits of Rs 3 crore and above, from Rs 2 crore above earlier (changed in 2019). For

local area banks (LABs), bulk deposits will now be defined as “Single Rupee term deposits of Rs 1 crore and above”, same as RRBs.

“On the regulatory front, the increase in bulk deposit limit to Rs 3 crore from Rs 2 crore, signals the RBI’s intention to encourage banks to garner greater retail deposits to fund credit growth,” Barua said.

• RBI will be setting up a Digital Payments Intelligence Platform which will harness advanced technologies to mitigate payment fraud risks. A committee will be constituted under the chairmanship of AP Hota, former MD & CEO, NPCI, to examine various aspects of setting up a digital public infrastructure.

• Framework for processing of e-mandate has been widened from including recurring periodic transactions, to now also include recurring but non-periodic transactions. For instance, replenishment of balances in Fastag, NCMC etc. The automatic replenishment will be triggered when the balance in Fastag or NCMC falls below a threshold amount set by the customer.

• UPI-Lite has been included now in the e-mandate framework. Currently UPI Lite allows customers to maintain up to Rs 2,000 in their wallets and make payments up to Rs 500. Now, customers will also have the facility of auto-replenishment for loading the UPI Lite wallet, if the balance goes below a threshold amount set by the customer.