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Informist, Wednesday, Oct. 9, 2024

 

By Siddharth Upasani

 

MUMBAI – After what seems an age, the Reserve Bank of India's Monetary Policy Committee on Wednesday finally dropped its 'withdrawal of accommodation' stance and moved into 'neutral' gear. Many will argue the central bank has reacted later than it should have, and that it had ample opportunity to change its stance in August, maybe even in June. So why has it decided to act now?

 

Predictably, RBI officials gave little away when asked why exactly the MPC had changed the stance of monetary policy this week. According to Governor Shaktikanta Das, the committee is now more confident about inflation moderating, although upside risks remain significant. The central bank chief's speech at the FIBAC banking conference in early September, in which he said the balance between inflation and growth was "well-poised" – the text of the speech on the RBI's website shows the sentence in bold for full measure – was seemingly a prelude to the explanation.

 

"We have changed the stance at the moment because we see that growth and inflation, they are well poised. So, the MPC considered it appropriate...the timing is appropriate to shift the stance to neutral," Das said on Wednesday.

 

Headline retail inflation has dropped sharply in the last two months, with data released after the MPC met in August showing it fell below the RBI's medium-term target of 4% in July for the first time in nearly five years, before edging up marginally to 3.65% in August. And even with an unfavourable base effect set to propel it to 5.1% in September, according to an Informist poll, the recent inflation prints have been sufficiently positive for the RBI to cut its forecast for Jul-Sept by 30 basis points to 4.1%.

 

Monetary policy, which acts on inflation with a lag of a few quarters, must be forward-looking. And the RBI's latest forecasts probably best explain the change in stance. While average CPI inflation in Oct-Dec is now seen 10 bps higher than the earlier forecast of 4.7%, the projections for the subsequent two quarters have been lowered by 10 bps each to 4.2% and 4.3%, respectively.

 

But the cherry on the proverbial cake was the Monetary Policy Report's assessment that average inflation will drop to 3.7% in Jul-Sept 2025. Even if this sub-4% forecast is not taken into account, the average of the RBI's quarterly inflation projections until June 2025 is 4.4%. According to QuantEco Research's economists, this is the first time in the post-pandemic period that the average of the RBI's four-quarters-ahead inflation forecasts has dropped below 4.5%.

 

There is more to unpack in the projections for 2025-26 (Apr-Mar), with retail prices now seen rising just 4.1% next year. Clearly, the inflation animal has become smaller and transformed into a horse from an elephant.

 

Horses, however, can still run; indeed, they can gallop, which elephants can't, and so the RBI remains "unambiguously focused" on durably lowering inflation to 4%. It was no surprise, then, that RBI officials refused to engage in a discussion on whether the change in stance constitutes a policy pivot. According to Deputy Governor Michael Patra, the Indian central bank wants to see off the sharp rise in headline retail inflation that is expected in September and October "before even considering the next move". Meanwhile, risks are plentiful, including the impact of adverse weather on food prices and the recent uptick in global commodity prices, including crude oil.

 

The RBI never makes any comments about the future path of monetary policy and prefers to err on the side of caution, with Governor Das repeatedly highlighting the future is "full of uncertainties...and risks (that) cannot be underestimated". Of course, this will not stop the markets from anticipating rate cuts, with Dec. 6 already circled by most for the first repo rate cut in what is being described by many economists as a "shallow" easing cycle.  End

 

Edited by Avishek Dutta

 

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