The Monetary Policy Committee’s first policy statement for FY25 had an ‘out-of-the-woods’ tenor written all over it. As Reserve Bank of India Governor Shaktikanta Das himself said at the start of the post-policy press conference, the policy was along expected lines — with a standstill in repo rates at 6.5 per cent. The policy projects growth and inflation rates for FY25 at 7 per cent and 4.5 per cent, respectively. This is against an expected growth rate and inflation rate for FY24, of about 8 per cent and 5.4 per cent, respectively. Despite the somewhat high base, the inflation projection is perhaps tinged with optimism.

The central bank’s projection of GDP growth of 7 per cent for FY25 appears based on the expectation of a normal monsoon this fiscal, which along with a robust rabi crop, is expected to lift rural demand. In FY24 and earlier years, rural demand had not kept up with its urban counterpart. Meanwhile, the RBI Governor expressed the hope that investment would become broadbased, given the sustained government impetus. As for CPI inflation, it has been hovering in the 5-5.5 per cent range over the last six months, led by food inflation in particular. RBI’s inflation projection for FY25, with the reading for second quarter dipping to 3.8 per cent, is premised on record rabi wheat production, a normal monsoon and benign global food prices. But high temperatures and any change in monsoon behaviour could play havoc with supply of vegetables and pulses.

Besides, global crude oil prices have been surging due to geopolitical tensions in the Middle East and tighter supplies; Brent crude has gained almost $10 in March 2024, crossing $90 a barrel, exceeding the MPC’s assumption of $85 a barrel. The MPC’s optimism on inflation is notable, given that foreign portfolio flows into the debt market are expected to accelerate in coming months, coinciding with the inclusion of Indian bonds in global bond indices. Unless the RBI decides to allow the rupee to appreciate, liquidity excess looks like a distinct possibility. Besides, the system liquidity has been moving into surplus since February due to higher government spending, reversal of the USD-INR sell swap auction initiated in March 2022 and the dollar purchases by the central bank to sterilise the foreign portfolio inflows into equity and debt markets.

Market interest rates are already exhibiting downward pressure as a result of liquidity surplus. Unless the RBI becomes proactive in mopping up liquidity, its ‘withdrawal of accommodation’ stance may seem out of sync in future months. Meanwhile, the proposal to issue a draft circular to review the liquidity coverage ratio framework is timely given ease of money transfers with growing digitisation. Similarly, providing a mobile app for buying and selling government securities on RBI’s Retail Direct portal, could improve participation of small investors in GILT securities.