RBI MPC Meet: ‘RBI won’t budge until elephant returns to the forest’: RBI Guv Das

RBI MPC Outcome: The first monetary policy meeting of the financial year FY25 is over, and even though the monetary policy meeting outcome was largely in line with the expectations- if not forward guidance then one point that RBI Governor Shaktikanta Das succeeded in putting across was the apex bank’s laser-focused approach and priority in bringing down inflation under its mid-term range of 4 per cent- as the Consumer Price Index-based (CPI) inflation remained above the medium-term target of 4 per cent for 53 months in a row.

The apex bank’s firm commitment to bring inflation in the RBI's tolerance band before taking any rate cut action is reflected in the RBI governor’s statement in which he said, “Two years ago, when CPI inflation peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We'd like the elephant to return to the forest and remain there durable. The CPI inflation must continue to moderate and align with the target on a durable basis. Till this is achieved, our task remains unfinished."

In a post-MPC presser, on being asked whether the elephant has reached the forest and is on the way to reaching the forest, Governor Das replied, “ Elephant moves at a slow pace, which means the last mile of disinflation is always slow and sticky.”

“The MPC stated that the policy decision was guided by its agenda of maintaining the growth-inflation tradeoff. Whilst growth prospects remain strong, price stability needs to be achieved. The Indian economy has demonstrated strong growth prospects in recent times. However, inflationary risks continue to remain on the upside marked by elevated food inflation, and crude price volatility besides supply-side disruptions globally,” Amnish Aggarwal, Head of Research at Prabhudas Lilladher said. 

Elephant ( Inflation) on the move

The RBI in its bimonthly monetary policy meeting kept the repo rate unchanged for the seventh time at 6.50 per cent. The growth and inflation forecast for FY25 were also kept unchanged at 7 per cent and 4.5 per cent respectively. Even though the core inflation has moderated to its lowest levels, food and headline inflation is still a cause of worry for the RBI- is the broader message RBI sent through its media briefing. 

“The inflation has moderated. We are driving satisfaction with the progress made on targeting inflation. But the task is not yet finished,” Das said in a post-monetary policy meeting briefing held on Friday. Similarly, on the growth front, the RBI said the Indian economy will grow at 7 per cent in FY25. 

Even Deputy Governor of RBI, Michael Patra also shed light on inflation and said that food inflation has been volatile. “Earlier it was cereals which were driving inflation, then vegetables, now its protein such as eggs and meats. They are short-duration spikes that give persistent pressure. We want there should not be any spillover.”Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities said.

“RBI Won’t Budge till the Elephant is Back in the Forest. Inflation has come down significantly from their 2022 highs of 7.79 per cent. However, the elephant of inflation remains above their comfort level of 4 per cent. With global and domestic growth being robust, there isn’t much of a chance of cutting rates any time soon,” Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities added. 

Upside Risks to Food Inflation

On being asked why the apex bank did not revise the inflation forecast, RBI governor Das said the bank is keeping an eye on inflation and will take any final decision only after seeing the impact of the weather on the food crops. The India Meteorological Department (IMD) has forecast above-normal temperatures and heatwave days during the summer season. Climate change has increased the frequency and ferocity of weather shocks, posing challenges for monetary policy. 

“All these developments could impart upside risk to the domestic food inflation trajectory and raise headline inflation by around 100 bps over the baseline. On the other hand, ample foodgrains buffer stocks and effective supply management could help ease food inflationary,” the RBI Monetary Policy Report stated on Friday.

In addition, in a post-MPC press briefing, RBI governor Das said that harvesting is over as far as the wheat crop is concerned. “Vegetable prices need to be watched going forward in the next three months of Apri, May, June.

Growth Trajectory

“Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment8 and improving the global environment. The second advance estimate (SAE) placed real GDP growth at 7.6 per cent for 2023-24, the third successive year of 7 per cent or higher growth,” Das added in his statement. 

The RBI also explained what drove more than expected growth in various quarters of the last fiscal year of FY24. The apex bank pegged growth at 6.5 per cent for Q2, 6.0 per cent for Q3 and 5.7 per cent for Q4. “However, the actual growth for Q2 turned out to be higher at 8.1 per cent led by sharper-than-expected expansion in gross fixed capital formation (GFCF). In Q3 also, the actual growth at 8.4 per cent overshot the projection due to than expected increase in GFCF and moderation in drag from net exports,” the RBI explained. 

Rate Cuts After US Fed?

Another important aspect that was raised during the presser was whether the apex bank was going to cut rates after the US Fed. Clearing the fog around this, Das replied, “I can’t give forward guidance on this. Even US or other countries DOT plots keep changing. So whatever rate action we are going to take is linked to the evolving path of inflation.” He went on to add that India’s monetary policy is primarily guided by domestic circumstances and situations. “ We don’t follow the steps of the US Fed. We did a rate cut in 2019 and increased rate in 2022 and we preceded the US Fed action.” Das opined.