RBI Keeps Rates on Hold as New Modi Administration Awaited

(Bloomberg) -- India’s central bank left its benchmark interest rate unchanged, as expected, keeping its focus on inflation amid policy uncertainty following an unexpected election result.

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The Monetary Policy Committee kept the benchmark repurchase rate at 6.5% Friday, and stuck to its relatively hawkish stance of “withdrawal of accommodation.” Two of the six MPC members voted for a cut, compared with one in the previous meeting.

The decision comes just days after a smaller-than-expected election victory for Prime Minister Narendra Modi’s party, forcing it to share power in a coalition government. That’s raised the risk the new government may veer from its relatively conservative fiscal path by raising welfare spending to shore up support, an approach that could keep inflation well above the central bank’s 4% target.

Even so, the extra dissenting MPC member raises the possibility that the central bank is moving closer toward a rate cut after keeping policy unchanged for more than a year. The two policymakers who voted for a rate reduction were external members, Ashima Goyal and Jayanth Varma.

What Bloomberg Economics Says

We see this as a sign the RBI is inching closer to a policy pivot. The hit to investor sentiment after Prime Minister Narendra Modi’s party lost its outright majority in parliament this week only adds to the case for a cut, in our view.

Abhishek Gupta, Senior India economist

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Most economists don’t expect any easing until the final quarter of this year, predicting the RBI will likely only move after the US Federal Reserve pivots.

“A switch in the voting pattern to 4:2 is interesting, though not a complete surprise based on the meeting minutes over the last two decisions,” said Anubhuti Sahay, an economist at Standard Chartered Plc. She predicted a shallow rate-cutting cycle of 50 basis points between October and December.

Stocks extended gains, with the NSE Nifty 50 Index rising 1.9%. The rupee edged higher, while bonds were little changed after the rate announcement.

Inflation Watch

Governor Shaktikanta Das hinted Friday the RBI may be willing to move before the Fed, pointing out its monetary policy actions are determined by domestic growth and inflation conditions.

“I’d like to unambiguously state while we do keep a watch on whether clouds are building up or clearing out in the distance horizons, we play the game according to the local weather pitch conditions,” he said in a live-streamed speech.

The RBI raised its economic growth projection for the current fiscal year through March 2025 to 7.2% from 7% and maintained its inflation forecast at 4.5%. Growth topped 8% in the past fiscal year, while inflation was at 4.83% in April, above the central bank’s target.

“With growth holding firm, monetary policy has greater elbow room to pursue price stability to ensure inflation aligns to target on a durable basis,” Das said. Policymakers should remain vigilant on inflation risks, and “uncertainties related to food prices need close monitoring,” he added.

A severe heat wave across the country has renewed fears of a price spike, even though monsoon rains, which irrigate half of India’s farmlands, have arrived on time, providing relief to farmers.

“We expect inflation dynamics to stay comfortable thereby making us project the start of a shallow 50 basis-point rate cut cycle from October 2024 even as strong growth provides space to further delay the timing with the US Fed also playing a key role,” said Kanika Pasricha, chief economic adviser at Union Bank of India.

In a press briefing later, Das declined to comment on worries that a coalition government may divert from its fiscal consolidation path to boost welfare spending.


The governor said the RBI will deploy an appropriate mix of instruments to manage frictional and durable liquidity in all segments of the market. His deputy Michael Patra added that the RBI would refine its toolkit and intervene “as and when needed.”

JPMorgan Chase & Co. will include India in its emerging markets bond index later this month, with the company estimating it may draw as much as $25 billion of inflows into the country’s debt market.

--With assistance from Jeanette Rodrigues, Shwetha Sunil and Vrishti Beniwal.

(Updates with latest comments from Bloomberg Economics)

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