- The RBI MPC voted for a pause but shifted to a ‘neutral’ stance to make the path ahead flexible.
- Oil prices are a wildcard.
- External stability is underscored by a record high foreign reserves stock.
- Reserves have not only risen by the most vs Asian peers
- Implications for forecasts: We retain our view for cuts to start in December.
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Decision and economic assessment
The RBI monetary policy committee (MPC) kept the repo rate on hold at 6.5%, with the stance dialled down to ‘neutral’ from a hawkish ‘withdrawal of accommodation’ earlier. The vote was 5-1 split, with one of the new external MPC members, Nagesh Kumar backing a rate cut. A softening in the MPC’s view on forward-looking inflation and preference to retain flexibility on the path ahead were behind the change in stance, in our view. Policymakers acknowledged ongoing durable disinflation towards the target, but hedged bets by highlighting two-way risks from domestic and global developments to the price outlook.
Policy outlook
Globally, the rate cycle has turned, underscored by the US Fed’s pre-emptive 50bp cut. Domestically, given the lag in the impact of the monetary policy action on growth, we expect policymakers to draw confidence from indications that inflation is headed towards the 4% target in the quarters ahead. The door remains open for a rate cut within 2024, on the back of a) near-term inflation risks are elevated on domestic food and weather, but underlying inflation risks including core inflation is expected to stay subdued on forward looking basis; b) softness in high frequency indicators might result in a modest downward revision in the growth forecast in December; c) remarks that “the prevailing and expected inflation-growth balance have created congenial conditions for a change in monetary policy stance to neutral” reflect a forward looking view when the mix is expected to become conducive.
Oil a key wildcard
With the geopolitical tensions in the oil-rich Middle East intensifying in recent weeks, the path for crude oil prices remains uncertain. Prices have yet far proved resilient, surfacing as a tailwind for the macro environment, hovering within a benign $75-$80bl, below the central bank’s official assumption. Any risks to crucial oil production facilities or a sharp improvement in the demand outlook (on China stimulus), might however trigger a breakout in the prices. Discounts from Russian crude prices and India’s import costs from other legacy suppliers have narrowed this year.
Steady climb in foreign reserves
India’s total foreign reserves surpassed $700bn to reach a record high of $704.8bn in late-September, the fourth country in the world to do so. Foreign securities dominate the reserves mix, alongside positive returns from higher coupon deposits with global central banks also boosted the nominal reserve levels. Net dollar purchases jumped by $29bn between Jan24 to Jul24, before likely moderating in Aug-Sep24 due to intervention presence to prevent one-sided rupee depreciation. The central bank also joined its peers in rebuilding its gold holdings, with its share rising to over 9% of the overall stock vs 6% in late-2019. Gold prices (dollar denominated) surged last quarter, provided positive valuation tailwinds.
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