RBI monetary policy: When boring is exciting

India, when compared to the US, has been rather boring, albeit in a good way. In contrast to the volatility in the US markets and macro data, India has been a beacon of stability.
 

Since the April policy decision, the macro outlook facing policymakers is also largely unchanged.
 

Inflation is gradually cooling, led by core, but is still above target, while food inflation remains an upside risk. 
 

Growth is a story of the glass half full or half empty. Headline GDP (gross domestic product) numbers are strong, but beneath the surface, weak private consumption and softer private investment remain concerns. 
 

Global risk factors — last mile inflation, a higher-for-longer Fed, geopolitical uncertainty, protectionism and oil prices — are also the same.  Even as many things look similar, take a step back and the big picture in India looks very different. 
 

India’s core CPI inflation has eased to below the 4 per cent headline target. Repeated food and oil price shocks have not resulted in second-round effects, pointing to an anchoring of inflation expectations.
 

The last financial year (FY24) ended with a fiscal deficit of 5.6 per cent of GDP, 0.2 percentage points below the Revised Estimate. Along with the windfall from the RBI’s dividend, this suggests a faster pace of fiscal consolidation is likely.

The outcome of the general election means policy continuity, a focus on capex, productivity enhancing reforms and factor market reforms that could boost growth potential without fanning inflation.
 

Our survey of manufacturing firms shows that India is benefitting the most in Asia from China plus one strategy, due to its large domestic market. If policy focus remains on improving the ease of doing business, the full benefit through higher exports should become visible. 

A faster pace of fiscal consolidation, continued reforms and stronger growth should attract more capital inflows and could also lead to more credit rating agencies following S&P’s lead.
 

Policymakers have also been proactive in building buffers.  India’s war chest of $650 billion in foreign exchange reserves provides ample space to deal with global shocks. 
 

Tighter macroprudential norms are a prudent and pre-emptive move by the Reserve Bank of India (RBI) to contain credit growth and prevent a build-up of undue risks.
 

So, what does all this mean?

For the June policy meeting, this means both the stance and repo rate would remain unchanged. Both the RBI’s GDP growth forecast of 7 per cent and CPI inflation projection of 4.5 per cent still appear reasonable for FY25. Steady growth offers policymakers scope to focus on building buffers for now. They need to watch the coming bond index inclusion, the final Budget and monsoons for their impacts. 
 

However, even as macro conditions look similar to those back in April, or even in February. India’s economic fundamentals are improving beneath the surface, which should compress India’s risk premium vis-à-vis the US, without risking capital outflows. 

This affords India the space to chart its own monetary policy path, without becoming hostage to the Fed. As headline inflation converges with core, the space to support a more broad-based growth recovery should open up in time. 

The author is the chief economist (India and Asia ex-Japan) at Nomura