Contrary to the popular perceptions and beliefs in this regard, history seldom exhibits any tendency to repeat itself. But historical facts could certainly provide interesting perspectives on many subjects and issues. Monetary policy-making could be one of them. Exactly five years ago, on February 7, 2019, the MPC of the RBI began an easing cycle, cutting the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent. The decision was not unanimous though — two members of the MPC voted against the rate cut. The next tightening cycle commenced in May 2022, the rapid pace of which bore some broad resemblance to the quick reduction in the policy rate in the aftermath of the onset of Covid-19 pandemic in March 2020. Since the last hike in the rate by 25 bps in January 2023, it has been held unchanged at 6.5 per cent.

As widely expected, the MPC announced a policy rate ‘pause’ for the sixth time in a row in its first meeting for 2024 held on February 6-8. The stance of monetary policy was also kept unchanged with a continued focus on withdrawal of accommodation. However, there was one dissenting vote on the rate decision — one member wanted it to be slashed by 25 bps. While one would be required to wait for a few weeks to know the contours of the case put forth by the dissenting member for a rate cut, it would be safe to say that the stage is now set for intense debates both within the MPC and without on the commencement of the next easing cycle and the way the Indian economy will transit to a regime of lower interest rates.

Pivot not in sight, yet

Although the rate decision of the MPC was as per expectations, the hopes of a large section of the financial markets that the stance of monetary policy would be changed to ‘neutral’ and also that the tone of the policy statement would be mild have been belied. The equity market fell sharply and G-Sec yield moved up slightly after the announcement, reflecting a realisation that that monetary policy will remain restrictive for longer than anticipated.

The policy statement did not contain any ‘dovish’ guidance, either. On the contrary, it has been made abundantly clear that in the views of MPC, the ‘policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission (of the cumulative 250 basis points of rate hikes in the current cycle).’ It reiterated its commitment to aligning inflation to the target of 4 per cent, even as it wants to successfully navigate the last mile of disinflation. And given the fact that since both the actual CPI inflation for 2023-24 so far and the projections for Q42023-24 as well as for 2024-25 are all above 4 per cent, and since the growth performance and outlook for the economy looks upbeat, it is unlikely that the MPC will provide any guidance or hint as regards the timings for change in policy rate or stance till about the middle of 2024. In other words, the spectacle of a turning monetary policy ‘pivot’ is still some distance away. However, things may change on political economy considerations after the next parliamentary elections, scheduled to be held in May.

Globally, central banks are expected to cut rates in 2024 as inflation has staged a significant retreat from the highs of 2022 and 2023. Few central banks, like those in Brazil and the Czech Republic, have already done so. As per some forecasts, a decline of 128 bps in an aggregate gauge of rates across the world is expected till the end of this calendar year. Few top officials of the Federal Reserve have already signalled 75 bps of cuts for the year, in what can be termed as a marked shift from their previous position that rates could still go higher through much of 2024. The European Central Bank has not yet given any indication of lowering its rate.

All in all, it would be interesting to see if the RBI’s stance undergoes any shift when the Fed or ECB starts slashing their rates later this year. In the midst of talks and speculations about rate cuts, a view has emerged that monetary policy did not have much to do with the post-pandemic surge in prices in many developed and emerging market countries.

Macroeconomic outlook

In the views of the RBI, the growth impulses of the Indian economy are currently strong and durable, propelled by structural drivers like improving physical and digital infrastructure, on the one hand, and macro-financial stability brought about by appropriate policy formulation, on the other. On the back of the estimated 7.3 per cent growth of real GDP for 2023-24 and above 7 per cent in each of the two previous years, the projection for 2024-25 has been pegged at 7 per cent. CPI inflation is projected at 5.4 per cent for the current year (2023-24) and that for 2024-25 at a much lower 4.5 per cent.

Moderation in CPI inflation in 2023-24 notwithstanding, the RBI is concerned about its volatility caused mainly by sharp fluctuations in food price. The policymakers are mindful of the reality that recurring food price shocks could derail the ongoing disinflation process, and could also lead to de-anchoring of inflation expectations and generalisation of price pressures.

After remaining elevated for a long time, core inflation (CPI inflation sans food and fuel) fell to a four-year low of 3.8 per cent in December 2023 and the RBI has indicated that it would endeavour to consolidate on the gains achieved so far in tackling inflation before it embarks on the next easing phase. Nevertheless, the lone voice in the MPC in favour of a rate cut will certainly be joined by many others in the days ahead.

The writer is a former central banker and a consultant to the IMF. Through The Billion Press