New Delhi: The Reserve Bank of India (RBI) is anticipated to maintain its current policy stance and interest rate for the eleventh consecutive period during its forthcoming October policy meeting, as per a research analysis conducted by the Bank of Baroda (BoB).
"The newly established Monetary Policy Committee (MPC) is expected to seek further clarity regarding the trajectory of inflation before initiating any monetary easing measures. Although the near-term inflation outlook appears positive, the decision-making process of the MPC is likely to be influenced by the long-term inflation and growth projections, as has been explicitly mentioned by the Governor," the report from BoB elucidates.
Despite inflation dipping below the central bank's target of 4 percent over the last two months, the Monetary Policy Committee (MPC) is set to maintain the status quo in its upcoming meeting, as detailed in the BoB report.
This decision is attributed, in part, to the recent decline in inflation being attributed to a "positive base effect," as per the analysis.
The MPC committee is scheduled to announce its decisions regarding the policy rate on October 9.
It has been noted that the volatility in food prices may prompt a cautious stance from the Reserve Bank, rendering a rate reduction unlikely at this time. A potential rate reduction could only be considered in the December policy meeting, when the central bank is confident that inflation has been moderated on a sustainable basis, the report suggests.
However, the report further indicates that the outlook for food inflation is positive, bolstered by a normal monsoon season and a favorable outlook for food inflation. It is expected that food prices will remain stable.
Moreover, the report highlights that the core inflation rate is stable and aligns with the expectations, suggesting that the overall inflationary pressure within the economy is being managed effectively.
The report also cautions that the unseasonal rainfall during the withdrawal of the monsoon season could adversely affect crop yields, potentially leading to an increase in food prices once again.
In light of this analysis, it is projected that India's macroeconomic fundamentals will continue to be solid, with the economy expected to achieve growth ranging from 7.3 to 7.4 percent in the fiscal year 2025. Consequently, it is anticipated that the Monetary Policy Committee (MPC) will exercise caution and await further evaluation of potential risks to the inflation trajectory before implementing any rate adjustments.
Regarding domestic economic growth, the latest high-frequency indicators offer a nuanced view of the economy during the second quarter of fiscal year 2025.
The Manufacturing Purchasing Managers' Index (PMI) decreased to 56.5 in September 2024 from 57.5 in August 2024. There has been a noticeable slowdown in vehicle sales, with Private Vehicle (PV) sales experiencing a decline of 4.5 percent in August 2024.
Similarly, tractor sales have seen a significant downturn. Additionally, the output of the core sector has contracted for the first time since February 2021.
Conversely, the growth of Goods and Services Tax (GST) e-way bills has remained consistent. The services sector is also demonstrating sustained expansion, as indicated by the services PMI.
The slowdown in domestic economic activity can be attributed to seasonal factors, with activity being notably subdued during the monsoon season.
Despite these challenges, India is projected to maintain a robust growth rate of 7.3 to 7.4 percent in fiscal year 2025.
In the most recent meeting of the MPC, the Reserve Bank of India (RBI) opted to maintain the policy rates at 6.5 percent. This decision was made in the face of ongoing concerns regarding inflation, which has yet to fall within the RBI's target range.
