Quite in line with general expectations the RBI Monetary Policy Committee retained the policy rates at the same level. The Repo Rate is at 6.50%. There is no change in the policy rates which reached the peak levels in Feb 2023. Incidentally, it may be mentioned here that the policy statement by the MPC is the 50th one in a row, since the introduction of the framework in Sept 2016. The inflation targeting framework completes eight years of its effective functioning.
The Governor in his policy announcement stated that the economy is growing at a robust rate, and to sustain growth at the current levels inflation needs to be contained, and that is what the policy is trying to achieve. He also mentioned that the household expectations on inflation remains anchored to the movement in the prices of food items, fruits and vegetables, and fuel. The statement reads: “the MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation. It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4.0 per cent on a durable basis.”
The GDP growth estimates given by the RBI forecasts a steady rate of growth, with the FY25 target rate of growth at 7.20%. There is only one small moderation that has been observed, that is for Q1 of FY25 where growth has been slashed from 7.20% to 7.10%. Domestic growth is supported by factors like the satisfactory progress in the monsoon, the higher cumulative kharif sowing, the pick-up in manufacturing activity, and also a gradual turnaround in rural demand. The IIP has accelerated recently, and the manufacturing PMI at 58.10 and the services PMI at 60.30, both for July 2024 remains at higher levels. Large government capex followed by a pickup in private capex supported by expansion in credit all of which augur well for the economy. This growth momentum can be sustained only by consistent efforts at inflation containment.
On inflation, the June headline inflation at 5.10% remains high, as against the target rate of 4.00%. While fuel price remains subdued the higher-than-expected food inflation remains a challenge. However, core inflation has moderated to 3.10% level, the lowest in recent history. Food inflation has a weightage of 46% in the CPI basket, and it accounts for almost 75 % of headline inflation in the month of May and June 24. Similarly, vegetable prices shot up and accounts for 35% of the inflation in June, 24. Inflation for FY25 is projected at 4.50%. This keeps the actual headline inflation at a distance from the target rate of 4.00%. This assumes greater importance from policy perspective due to the fact that inflation containment to sustain growth has been stated as the major plank on which the policy is based. Therefore, a sustained fall in inflation is to be seen before any policy action, ceteris paribus. Some of the surveys put the timing of rate cut as somewhere close to December this year.
Liquidity in the interbank market has been in surplus for a while now, and government securities auctions have sailed through smoothly so far. The ten-year benchmark yield has moved down from 7.40% in Nov 23 to 6.85% at present. The fall in the market yields was facilitated by the inflows from bond index inclusion, lower government borrowing program and the resultant likely lower supply at the primary, and the salubrious liquidity conditions. Any advance in market yields to lower levels would depend to a larger extent on the trajectory of policy rates. In other words, the intensity of the fall in yields may be slower in the coming months. While there is certainty about a rate cut in the future, the timing may be a little later than we expect it. We continue to recommend bonds and gilt funds with longer duration as appropriate avenues to be invested into for the final mile.
