RBI POLICY CHEERS, SHOWS MPC SPLIT

The RBI's Monetary Policy statement keeping policy repo rate unchanged at 6.50 per cent and remaining focused on ensuring that inflation progressively aligns to the target of achieving the target of consumer price index (CPI) inflation of 4 per cent while supporting growth, revised upward in FY25 to 7.2 per cent, has been welcomed by economists and industry.

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The real GDP growth for 2024-25 is projected at 7.2 per cent with Q1 at 7.3 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent.

The first message is that while headline inflation has seen sequential moderation since February 2024, albeit in a narrow range from 5.1 per cent in February to 4.8 per cent in April 2024, there is no room for complacency. Food inflation remains elevated due to persistence of inflation pressures in vegetables, pulses, cereals, and spices. However, looking ahead, overlapping shocks engendered by rising incidence of adverse climate events impart considerable uncertainty to the food inflation trajectory. Inflation is expected to temporarily fall below the target during Q2:2024-25 due to favourable base effect, before reversing subsequently.

The RBI has called for close monitoring of market arrivals of key rabi crops, particularly pulses and vegetables. Normal monsoon, however, could lead to softening of food inflation pressures over the course of the year. At the same time, volatility in crude oil prices and financial markets along with firming up of non-energy commodity prices pose upside risks to inflation. Taking into account these factors, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.

Second, the RBI decision shows signs of a more divided monetary policy committee, with one additional member voting for a softening in stance as well as policy direction. The majority retained their cautious stance to guide inflation towards the 4 per cent target on a durable basis, despite recent signs of disinflation. Concurrently, the FY25 growth forecast was revised up by 20 basis points to 7.2 per cent, underscoring the official optimistic view on recovery prospects.