RBI MPC Meet: Analysing key macro changes in domestic economy, global developments since June

A global rate-cut cycle has already begun in the developed world. The Bank of England recently went ahead with its first interest rate cut in over four years, bringing the key rate to 5.0%. The European Central Bank (ECB) is expected to cut rates by 0.5 percentage points at its September meeting. The Swiss National Bank has made its second rate cut in the last three months. The Bank of Canada also cut its policy rate by 25 basis points to 4.75% in June, marking its first cut in four years.

The Monetary Policy Committee (MPC) has made a cumulative policy repo rate hike of 250 basis points to 6.5%  since May 2022 when the Russia-Ukraine conflict raised the inflation fears globally. Inflation, though came down from the highs, has remained sticky in India because of persistently high food prices. 

As the six-member monetary policy panel will announce its results tomorrow (August 8) on the rate decision, there are some macro-economic changes since the June monetary policy meeting. These include Union Budget 's aggressive fiscal consolidation target, US recession fears and rate cuts in the developed world. While the RBI is expected to keep the policy repo rate unchanged at 6.5%, it will be interesting to hear the central bank's commentary on India's macroeconomic conditions and global developments. Here's a look at the key macro changes;

Economic Survey on growth projection

The Economic Survey 2024 has provided a conservative estimate for real GDP growth, projecting a range of 6.5-7% for 2024-25. In contrast, the RBI has predicted a GDP growth rate of 7.2% for the same period, having revised its projection upwards from 7.0% to 7.2% in the last policy meeting. While the RBI remains optimistic, the Economic Survey, authored by Chief Economic Advisor V. Anantha Nageswaran, adopts a more cautious tone. If growth is a concern, the RBI all the more should consider a small rate cut.

Aggressive fiscal consolidation path

The government has pursued an aggressive fiscal consolidation path, targeting a fiscal deficit of 4.9%, down from the 5.1% of GDP set in the interim budget. Given the government's commitment to fiscal consolidation, the fiscal space to spend more on capex is shrinking very fast. The private investments are yet to pick up. This may shift the onus on the RBI to adopt a more accommodative monetary policy. In the June policy meeting, two of the six members of the MPC—Ashima Goyal and Jayanth R. Varma—rooted for  reduction in the policy repo rate by 25 basis points." It now appears that the maintenance of restrictive policy for unwarrantedly long will lead to a growth sacrifice in 2025-26 as well," said Varma in the minutes of the MPC meeting in June this year.

Recession fears in US

Fears of a recession in the US economy have created conditions for a potential rate cut by the US Federal Reserve. The US Fed rate, the benchmark short-term lending rate, is currently around 5.25%-5.50%, while the RBI's benchmark repo rate stands at 6.5%. This differential between the two is at a historic low, and any cut in the Fed rate could increase the differential with a consequent impact on fund flows into India.

Although RBI Governor Shaktikanta Das has stated many times that India's monetary policy operates independently of the Fed's decisions, a Fed rate cut could provide a case for the RBI to consider a rate cut as well, especially if the Fed goes for an off-policy rate cut before the September policy meeting. "While some of the expectations do seem overstretched at this stage, we do see a high chance of the Fed starting its rate cut cycle in September – delivering a cut of 25bps. This could have implications for the rupee and the RBI could start aligning its monetary policy with the global rate cycle to reduce any significant future policy deviations," says HDFC Bank in its report. 

Global rate cut cycle

A global rate cut cycle has already begun in the developed world. The Bank of England recently gone ahead with its first interest rate cut in over four years, bringing the key rate to 5.0%. The European Central Bank (ECB) is expected to cut rates by 0.5 percentage points at its September meeting. The Swiss National Bank has made its second rate cut in the last three months. The Bank of Canada also cut its policy rate by 25 basis points to 4.75% in June, marking its first cut in four years.