Macro Review

April 05, 2024 | Vol. 6, Issue 3

RBI Monetary Policy: Yet another pause, inflation remains in focus

The RBI’s Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.5% and retain
the ‘withdrawal of accommodation’ stance on a 5:1 majority. The Committee reiterated the need to bring down
inflation to the 4% target on a durable basis in the light of volatile food prices, supported by a resilient growth
landscape. Prof. Jayant R. Varma dissented for yet another time, voting for a 25bps cut and a change in stance to
‘neutral’. Headline inflation for FY25 is projected at 4.5%, with a sub-4% print in the second quarter, benefiting
from an expected normal monsoon this year and the recent cut in fuel/LPG prices, and is pegged at 4.1% for FY26.
That said, persistent volatility in food prices and supply disruptions caused by escalation in geopolitical hostilities
may continue to impart upside pressure. Growth outlook remains robust, with FY25/26 GDP growth projected at
7% each, supported by strong investment activity and buoyant private consumption. The RBI’s nimble and flexible
approach towards liquidity management via variable rate repo (VRR) and reverse repo (VRRR) operations has
ensured liquidity conditions remain aligned with the monetary policy stance. Other major regulatory
announcements include trading permission to eligible foreign investors in Sovereign Green Bonds (SGrBs) in IFSC,
introduction of a mobile app for the RBI Retail Direct Scheme, allowing small finance banks to deal in permissible
rupee interest derivative products, and wider UPI use and access.
The MPC’s decision to retain status quo was in line with expectations. Inflation has subsided but remains above
the 4% target, with upside risks emanating from the persistent volatility in food prices and geopolitical tensions.
The resilient growth outlook provides policy space to the MPC to unwaveringly focus on ensuring price stability on
a durable basis by working towards fuller transmission of past rate hikes and anchoring of household inflation
expectations. This leaves little scope for any change in rate/stance in the near term. Until then, RBI is likely to
continue to focus on liquidity management to ensure liquidity conditions remain aligned with the monetary policy
stance, and money market rates remain closer to the policy repo rate.
• Yet another pause: The RBI’s MPC expectedly decided to retain the policy repo
The RBI expectedly kept
rate at 6.5% and the ‘withdrawal of accomodation’ stance with a 5:1 majority, citing the policy repo rate
the need to maintain vigilance on food and other supply shocks that may hinder the unchanged at 6.5%,
ongoing disinflation trend. The MPC reiterated its commitment to ensuring price retaining the “withdrawal
stability on a durable basis, which in turn would provide a conducive environment of accommodation” stance
for sustainable growth. With this, the Standing Deposit Facility (SDF) and the with a 5:1 majority.
Marginal Standing Facility (MSF) rates—the upper and lower bounds of the Liquidity
Adjustment Facility (LAF) corridor—remained unchanged at 6.25%, and 6.75%
respectively. Prof. Jayanth R. Varma dissented for yet another time and voted in
favour of a 25bps cut and a change in the policy stance to ‘neutral’.
• Inflation for FY25 projected at 4.5%: Moderating inflation conditions are
Inflation
GDP growthprojected
forecastat
expected to sustain in the near term, benefiting from an expected normal monsoon, 4.5%/4.1%
upgraded byin10bps
FY25/26,
to
record wheat buffer stock, recent cut in LPG/fuel prices and continuing focus on whereas GDP growth
6.5%, with FY25 estimate
policy transmission. That said, the outlook remains vulnerable to food price forecastatfor
pegged FY25/26
similar is
levels.
uncertainties, and supply shocks emanating from persistent geopolitical tensions. pegged at 7% each.
Considering these risks, inflation is projected to average 4.5% in FY25—4.9% in Q1
(vs. 5.0% earlier), 3.8% in Q2 (vs. 4%), 4.6% in Q3 and 4.5% in Q4 (vs. 4.7%). For
FY26, assuming a normal monsoon and no further external shocks, headline
inflation is projected to average 4% in FY26, ranging between 3.9% and 4.3%. Key
upside risks to the outlook include weather-related wagaries, escalation in
geopolitical tensions and resultant supply-side disruptions, and financial market
volatility.
• GDP growth for FY25 pegged at 7%: Amidst a resilient global economy, the
domestic economic outlook remains robust, underpinned by strong investments by
the public and private sectors. With rural demand catching up and urban demand
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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

staying buoyant, the overall consumption demand should revive in FY25.

Additionally, healthy corporate and bank balance sheets, coupled with a continued
focus on capital expenditure by the Government, provides a conducive
environment for a durable recovery in the private capex cycle. As such, the RBI
expects growth to remain strong over the next years, projecting FY25 and FY26
GDP growth at 7% each. This, if materialised, would translate into five years of a
7%+ growth trajectory for India (FY22-26). Key downside risks may emanate from
geopolitical uncertainties in the Middle East, volatility in international financial
markets, geoeconomic fragmentations and extreme weather events.
• Liquidity deficit eases in the face of nimble management: Systemic liquidity
eased significantly in the February-March period to a deficit of Rs 1 lakh crore
compared to Rs 1.6 lakh crore in the December-January period. In fact, average
liquidity deficit fell to Rs 0.4 lakh crore in March, and has remained in surplus since
March 30th, 2024. This is due to considerable injection of liquidity by the RBI in the
form of undertaking multiple VRR auctions, which was followed by VRRR auctions
in response to the surpus in liquidity witnessed recently. These measures have all
been taken with a focus on keeping the interbank rate close to the repo rate, and
have succeeded in bringing the average Weighted Average Call Money Rate (WACR)
to 6.61% in February-March from 6.76% in December-January. The RBI is likely to
continue to remain flexible in its liquidity management approach to facilitate fuller
transmission of the previous rate hikes into the system.

• Regulatory measures: RBI has now permitted eligible foreign investors in

International Financial Services Centre (IFSC) to invest in Sovereign Green Bonds,
with the view of fostering wider non-resident participantion. In addition, Small
Finance Banks (SFBs) are now allowed to deal in permissible rupee interest
derivative products to provide them with wider hedging avenues. RBI is also
considering making modifications to the Liquidity Coverage Ratio (LCR) framework
for better liquidity risk management by the banks. Apart from this, a mobile
application of Retail Direct portal would be launched to allow investors to
conveniently buy and sell government securities. Amid the increasing usage and
popularity of the UPI, RBI has now proposed to: (i) introduce cash deposit facility
using UPI, and (ii) permit the linking of Prepaid Payment Instuments (PPI) through
third party UPI applications. The RBI also intends to expand CBDC-Retail user
access by enabling wallet offerings from non-bank operators.

• Rates to remain on hold for now: The MPC’s decision to retain status quo was in
line with expectations. Inflation has subsided but remains above the 4% target,
with upside risks emanating from the persistent volatility in food prices and
geopolitical tensions. The resilient growth outlook provides policy space to the MPC
to unwaveringly focus on ensuring price stability on a durable basis by working
towards fuller transmission of past rate hikes and anchoring of household inflation
expectations. This leaves little scope for any change in rate/stance in the near term.
Until then, RBI is likely to continue to focus on liquidity management to ensure
liquidity conditions remain aligned with the monetary policy stance, and money
market rates remain closer to the policy repo rate.

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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Table 1: Current policy rates

The policy repo rate was retained at 6.5% in the April policy, accompanied with continuation of “withdrawal of
accommodation” stance, with a 5:1 majority.
Key rates Oct 2023 Dec 2023 Feb 2024 Apr 2024
Repo Rate 6.50% 6.50% 6.50% 6.50%
Standing Deposit Facility (SDF)* 6.25% 6.25% 6.25% 6.25%
Marginal Standing Facility (MSF) 6.75% 6.75% 6.75% 6.75%
Bank Rate 6.75% 6.75% 6.75% 6.75%
Cash Reserve Ratio (CRR) 4.50% 4.50% 4.50% 4.50%
Source: RBI, NSE EPR. * Introduced in April 2022 policy as the new floor of the LAF corridor.

Figure 1: Movement in key policy rates

Flexible liquidity management by the RBI has helped bring down money market rats closer to the policy repo rate. The
average Weighted Average Call Money Rate (WACR) to 6.61% in February-March from 6.76% in December-January.
% Movement in policy rates
8.0 Repo Rate SDF MSF CRR Call Money Rate

7.0

6.0

5.0

4.0

3.0

2.0
Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24
Source: Refinitiv Datastream, NSE EPR.

Figure 2: Real interest rates

% Repo rate (6.5% in Apr 24) CPI inflation (5.09% in Feb 24)
14 4% (RBI's current long-term target, +/-2%)

12
Demonetisation COVID-19
RBI adopts flexible
10 outbreak
inflation targeting (FIT)

6
RBI's target band for
4
headline CPI inflation

0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: LSEG Datastream

Source: Refinitiv Datastream, NSE EPR.

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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Figure 3: Net lending under RBI’s Liquidity Adjustment Facility

Systemic liquidity eased significantly in the February-March period to a deficit of Rs 1 lakh crore compared to Rs 1.6
lakh crore in the December-January period. In fact, average liquidity deficit fell to Rs 0.4 lakh crore in March, and has
remained in surplus since March 30th, 2024.
Rs lakh cr
Net lending under RBI's Liquidity adjustment facility
Outstanding amount under reverse repo operations
Outstanding amount under repo operations Figure greater than zero
4
Net lending under LAF indicates deficit liquidity in the
system
2

-2

-4 Figure less than zero indicates

surplus liquidity in the system
-6 Systemic liquidity in surplus in the fiscal
so far

-8

-10

-12
Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Jul-22 Oct-22 Jan-23 Apr-23 Jul-23 Oct-23 Jan-24 Apr-24

Source: CMIE Economic Outlook, NSE EPR.

Figure 4: India sovereign yield curve

% India sovereign yield curve

31-Mar-22 31-Mar-23 31-Dec-23 04-Apr-24

8.40

7.4
7.60
7.0 7.3
6.80
6.9

6.00

5.20

4.40

3.8
3.60

2.80

2.00
3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 15Y 19Y 24Y 30Y
Source: Refinitiv Datastream, NSE EPR.

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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Figure 5: India vs. US policy rates and yield differential

10 India - CPI (% YOY) (5.09%) Fed funds rate (%) - R (5.5%) 10

RBI repo rate (%) - R (6.5%)
9
8
8

7
6
6

4
5

4
2
3

2 0
19 20 21 22 23 24

6 India-US 3m G-Sec spread (1.71%) India-US 2y G-Sec spread (2.37%) 6

India-US 10y G-Sec spread (2.79%)

5 5

4 4

3 3

2 2

1 1
19 20 21 22 23 24
Source: LSEG Datastream

Source: Refinitiv Datastream, NSE EPR.

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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Figure 6: India’s consumer inflation trajectory and RBI’s forecasts

The headline inflation for FY25 is projected at 4.5% with marginal downward revisions in Q1FY25 (10 bps), Q2FY25
(20bps) and Q4FY25 (20bps). For FY26, assuming a normal monsoon and no external shocks, CPI inflation is expected
to average 4.1%.
%
India average annual consumer inflation trajectory
CPI inflation Core CPI Inflation
11.0 RBI projections (Feb'24) RBI projections (Apr'24)

10.0

9.0

8.0

7.0

6.0
5
5.0 5.4 5.4 4.6 4.7 4.5
5 4
4.0
4.1

3.0

2.0
FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
Q1FY23

Q2FY23

Q3FY23

Q4FY23

Q1FY24

Q2FY24

Q3FY24

Q4FY24E

Q1FY25E

Q2FY25E

Q3FY25E

Q4FY25E
Source: CMIE Economic Outlook, RBI EPR. Core inflation is calculated as CPI inflation excluding food, pan, tobacco & intoxicants and fuel & light.

Figure 7: GDP growth trend and RBI’s estimates

Growth momentum is expected to sustain in FY25, with the GDP growth forecast pegged at 7% in FY25. For FY26, GDP
growth is also estimated at 7%.
Annual GDP growth trend
%
12.0
9.8
10.0
8.5 8.3
7.9 8.0 7.6
8.0 7.4 7.0 7 7
6.4 6.8 6.5
5.2 5.5
6.0
3.9
4.0

2.0

(2.0)

(4.0)

(6.0)
-5.8
(8.0)
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24SAE

FY25RBIe

FY26RBIe

Source: CMIE Economic Outlook, RBI, NSE EPR. RBIe = RBI estimate, SAE = First Advance Estimate.
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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Figure 8: Quarterly GDP growth forecasts by RBI for FY25

% Quarterly GDP growth estimates
7.3
7.2
7.2
7.1
7.1
7 7 7
7.0
6.9 6.9
6.9
6.8
6.8

6.7

6.6
Q1FY25 Q2FY25 Q3FY25 Q4FY25

Source: RBI, NSE EPR.

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 Macro Review
April 05, 2024 | Vol. 6, Issue 3

Economic Policy & Research

Tirthankar Patnaik, PhD tpatnaik@nse.co.in +91-22-26598149

Prerna Singhvi, CFA psinghvi@nse.co.in +91-22-26598316
Ashiana Salian asalian@nse.co.in +91-22-26598163
Prosenjit Pal ppal@nse.co.in +91-22-26598163
Ansh Tayal atayal@nse.co.in +91-22-26598163
Anand Prajapati aprajapati@nse.co.in +91-22-26598163
Shuvam Das shuvamd@nse.co.in +91-22-26598163
Abhijay Nair consultant_anair@nse.co.in
Shantanu Sharma consultant_shantanus@nse.co.in

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