RBI Monetary Policy: Non-Committal Pause, But Pause For Good

The unchanged policy rate and stance has been met by non-committal forward guidance, clearly giving more stress to fluid and uncertain global situation, implying macro assessments might require appropriate adjustments ahead from the policy perspective. However, the Governor stressed that their inflation fight is not over and we are still away from durable disinflation with unyielding core inflation still a concern.

We believe the fear that "speed can kill" has led to dovish turn from a number of central banks in both DMs & EMs, amid growing concerns over transmission of policy tightening to growth and the same rub-off is happening in RBI's reaction function.

The anticipation of near-ending rate cycle in the West (and quick policy reversal), and the need to assess monetary-policy lags of the hikes so far has played a dominant role in RBI's reaction function than the recent inflation misses. We see FY24 average headline/core inflation at 5.2%/ 5%.

Besides, the material improvement in external sector outlook amid easing trade deficit and services exports surge, has implied support for INR from the current account side and given some breather to RBI as well on rates stance (we see FY24 CAD/GDP at 1.9%).

We think it appears to be a pause for good especially as the ex-ante real rates looking around 1.1% -- keeping our one-year forward inflation forecast as anchor, giving them comfort and flexibility on their supposed stance and actions ahead.

(Madhavi Arora, the author is Lead Economist, Emkay Global Financial Services)