Financial markets have a habit of running ahead of events. Therefore, it was not surprising that the Monetary Policy Committee (MPC) didn’t deliver to expectations of a dovish slant in its latest review. Amid tight fiscal deficit targets set in the Budget and rising bets for US rate cuts, it is good that MPC kept an Arjuna’s eye trained on its inflation control mandate. The December CPI inflation print at 5.7 per cent was far above RBI’s comfort level of 4 per cent.

Inflation continues to be a worry due to fresh global supply chain disruptions at the Red Sea, the troubling domestic reservoir situation and a still active El Nino. Therefore, the decision to keep the repo rate unchanged at 6.5 per cent makes sense. While the global debate has shifted away from runaway inflation to the likely pace of disinflation, the RBI still appears to be wary of this about-turn. In his statement, the Governor noted that the last mile of disinflation tended to be challenging and could be disrupted by food price shocks. The statement also pointed to the considerable volatility in India’s CPI, with its readings swinging between 4.3 per cent and 7.4 per cent in the current fiscal. Emphasising that it would like to see CPI inflation decline to 4 per cent on a ‘durable basis’, the RBI projected inflation for FY25 at 4.5 per cent, with the prints for the four quarters at 5 per cent, 4 per cent, 4.6 per cent and 4.7 per cent.

The central bank also seems to be quite sanguine about the economy doing well without a helping hand from rate cuts. Real GDP growth forecast for FY25 has been revised upwards to 7 per cent, despite a high base. All this suggests that the RBI is not necessarily pencilling in rate cuts in the second half of FY25 as markets expect and will remain data-dependent to make this call. However, it is possible that a sharp decline in market interest rates which is already underway since the Budget, and rate cuts in the Western world, will force its hand on this.

Apart from signals on rate cuts, market participants were expecting the MPC to change its stance on liquidity from ‘withdrawal of accommodation’ to ‘neutral’. Tight liquidity conditions prevailing in the money market have led to banks grappling with high credit-deposit ratios and AAA-rated companies borrowing short-term money at rates approaching 8 per cent. This had led them to hope that the RBI would ease up on liquidity which has been in short supply since September. But the central bank did not oblige on this score, with the Governor making it clear that the policy stance on liquidity has to be in sync with that on rates. But then, if the lack of visibility on rate cuts is negative for banks and borrowers, it is good news for savers and depositors who can hope to enjoy higher returns for some more time, after the privations of the Covid years.