RBI MPC Minutes: June Meeting

 Focus Remains on Last Mile of Disinflation

The June meeting of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) continued to emphasize caution regarding the inflation trajectory. Most members supported a wait-and-watch approach, citing resilient growth prospects that provide some leeway. Our outlook remains for shallow rate cuts starting from the December policy meeting, with a potential change in stance either in the October meeting or concurrent with the rate cut action.

Persistent Caution on Inflation; Food Inflation a Key Concern

Four out of six MPC members maintained a cautious stance on inflation, with a significant focus on food inflation. Dr. Ranjan underscored the importance of a normal monsoon, particularly its spatial and temporal distribution, and the recharge of reservoirs for sustained disinflation in food and headline Consumer Price Index (CPI). Both Dr. Ranjan and Dr. Patra highlighted that recurring food price shocks are delaying the final descent of inflation to the target, necessitating continued vigilance in monetary policy. The members collectively stressed the importance of ensuring a durable shift toward the 4% inflation target. The Governor commended the MPC members for their proactive disinflationary stance, which has achieved disinflation with minimal output sacrifice, given the strong growth. However, he noted that the last mile of disinflation is proving to be gradual and protracted.

Confidence in Growth Prospects

On the growth front, nearly all members expressed confidence in the resilient economy, driven by a robust investment cycle and strong performance in the manufacturing and service sectors. Dr. Patra mentioned that the output gap is nearly closed, while Dr. Ranjan pointed out that potential output has increased due to enhanced productivity from digitalization, the formalization of the economy, favorable demographics, rising labor force participation, and accelerated capital formation. This resilient growth, they noted, allows monetary policy to focus squarely on inflation.

Concerns Over Growth Sacrifice

However, Dr. Varma and Dr. Goyal highlighted concerns about the restrictive monetary policy potentially inducing a significant growth slowdown, albeit with a lag. Dr. Goyal argued that if headline inflation is nearing the target and core inflation is below target, and if incoming data supports this trend, it indicates that growth is below potential and the neutral real policy rate is above neutral. Therefore, real policy rates can safely be reduced.

Wait-and-Watch Approach; Anticipated Shallow Rate Cut Cycle

The minutes of the June MPC meeting reaffirmed the commitment to achieving a durable alignment of headline inflation with the 4% target, while acknowledging the increased leeway provided by resilient growth. We note that the domestic macroeconomic outlook will remain the primary driver for monetary policy decisions, as highlighted by Dr. Goyal and Dr. Ranjan. We expect the MPC to adopt a wait-and-watch approach as it assesses (1) the global asynchronous monetary policy cycle and (2) the outcome of the monsoon (both spatial and temporal distribution). Our forecast continues to anticipate a shallow rate cut cycle (75-100 basis points) commencing from the December policy meeting, with a possible change in stance either in the October policy or along with the rate cut action.