RBI MPC Meet Begins Amid Inflation Fall, Growth Cool-Off; 25 bps Cut Expected

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) meeting begins today in Mumbai, chaired by governor Sanjay Malhotra. The six-member committee will announce their policy decision on Friday, June 6, as inflation eased and estimated growth moderated in the last fiscal year.

India's inflation, based on the consumer price index (CPI), cooled to a six-year low in April and stood at 3.16% year-on-year. This was mostly driven by moderation in vegetable prices. The inflation rate stood at 3.34% in March and 3.61% in February.

RBI’s monetary policy committee unanimously cut the policy repo rate by 25 basis points (bps) to 6% at its April meeting. This was the second consecutive cut followed by a 25 bps cut in its February meeting, marking the first cut since May 2020.

Meanwhile, India’s real gross domestic product (GDP) gained strength as it picked up pace sequentially to a four-quarter high of 7.4% in January-March. beating the market projection of 6.8%, on the back of firm industrial growth in manufacturing, construction and mining sectors, even as consumption demand slowed down. However, the country's growth in the last financial year estimated to fall to 6.5% compared to 9.2% growth registered during the FY24.

Earlier, Outlook Business reported that many economists are expecting a rate cut on Friday between 25-50 bps. Meanwhile, the minutes from the previous meeting also indicated a growing shift towards a further rate cut.

"While it is difficult to make forward-looking projections on global growth where significant uncertainties still exist, the latest domestic growth data suggest limited downside risks to growth. Therefore, we expect a 25 bp cut in policy rate at the June MPC meeting. This coupled with the ongoing accommodative stance, will position MPC to react to any data surprises on either side," said Mandar Pitale, head of financial markets at SBM Bank (India).

"By adequate modulation in the systemic liquidity, RBI has ensured overnight rates hovering at lower end of LAF corridor in the recent past, thus effectively easing by 75 bps as against 50 bps rate reduction till now in this rate reduction cycle," he added.

Pitale also noted that the lowering interest rate differential between US and India and its impact on overseas investments (FPI flows) in India and the mid to long term trajectory of the inflation factoring in adverse base effect (lower base increasing the YOY number) will weigh in MPC decisions as the policy rate goes further lower.