By Dharmakirti Joshi, Chief Economist, CRISIL

Awaiting a better handle on price trends

As expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.50%. It has been 14 months since the rate was last raised. That said, over the last year, the central bank did tighten monetary conditions by reducing liquidity.

With inflation trends mixed, the MPC prefers to wait for clearer signs of easing towards its 4% target. Strong growth momentum in the economy has provided it space to do so.

While food inflation was above 8% in the most recent reading, non-food was way lower at 2.9%. Core inflation at 3.4% was well below RBI’s 4% target.

Monsoon this year could be better than last year, with the US National Oceanic and Atmospheric Administration (NOAA) expecting La Niña conditions to develop by June-August, which augurs well for the southwest monsoon. Last year El Niño and weak rains curtailed food output. This would be positive for rural demand as well as food inflation in the current fiscal.

The picture of monsoon will be clearer by the next MPC review meeting in June.

Easing food inflation and benign non-food inflation should bring headline inflation closer to the RBI’s target of 4%. That said, any weather disruptions and sustained uptick in crude oil prices will remain monitorable.

The transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out. We expect growth and inflation in fiscal 2025 at 6.8% and 4.5%, respectively.

Overall, the macro environment is likely to turn favorable for a rate cut by mid-2024 in our base case, lest oil prices and monsoons play a spoilsport.