FX.co ★ India Holds Key Interest Rates As Expected; Raises Growth Outlook

India’s central bank has maintained its key interest rates for the eighth consecutive session on Thursday, reinforcing its commitment to a disinflationary stance until inflation stabilizes at the target level amidst robust economic growth.

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, voted 4-2 in favor of keeping the policy repo rate steady at 6.50 percent. Since the beginning of the current tightening cycle in May 2022, the bank has raised the repo rate by a cumulative 250 basis points, holding at 6.50 percent since February 2023.

The Committee also resolved to persist in withdrawing accommodation, aiming to align inflation with the target while fostering economic growth. Notably, policymakers Ashima Goyal and Jayanth Varma advocated for a 25 basis point reduction in policy rates and a shift to a neutral monetary policy stance.

The MPC observed that the domestic growth-inflation balance has improved favorably since its previous meeting in April 2024. The bank anticipates a temporary dip in inflation below the target in the September quarter, attributed to a favorable base effect, before it trends higher again.

“The MPC remains steadfast in its commitment to achieving a durable alignment of inflation with the 4 percent target,” the bank stated.

Furthermore, the central bank upgraded its growth forecast for 2024-25 to 7.2 percent, up from an earlier estimate of 7.0 percent. “If the projected GDP growth of 7.2 percent for 2024-25 is realized, it will mark the fourth consecutive year of growth at or above 7 percent,” Governor Das noted.

Governor Das also highlighted that the headline consumer price index (CPI) is on a disinflationary trajectory, although recurring food price shocks have decelerated the overall disinflation process. Despite this, the CPI inflation forecast for 2024-25 remains at 4.5 percent.

Currently, consumer price inflation is at 4.8 percent, residing in the upper half of the 2-6 percent target range. Economists at Capital Economics predict that headline inflation could achieve the central bank’s 4 percent target by July, potentially prompting the RBI to commence policy easing in August.

ING economist Robert Carnell, however, suggests that the RBI is unlikely to reduce rates until the fourth quarter of this year. He added, “We could advance this to the third quarter if the Federal Reserve begins to ease beforehand, as this would alleviate some pressure on the Indian Rupee (INR).”