The Reserve Bank of India’s bi-monthly monetary policy committee (MPC) meeting for the new FY25 will kick off on April 3, and the outcome will be known on April 5, after the three-day deliberation. Analysts largely expect the central bank to maintain the status quo on key policy rates, and if done, it will be the seventh consecutive time the RBI will leave policy rates unchanged.

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Furthermore, there is a view that the stance should continue to be the ‘withdrawal of accommodation’. Typically, such a policy stance in the RBI’s policy action means that the central bank will resort to reducing the money supply in the system to curb inflation further.

Nevertheless, maintaining a different view on stance, Parijat Agrawal-Fixed Income, Union Mutual Fund, said while they do not expect any change in the policy rate, a probable explicit or implicit change in stance cannot be ruled out.

Pertinently, the policy action by the RBI will be taken at a time when the US Fed, in its last policy meeting, opted to maintain its federal funds interest rate at the current target range of 5.25–5.5 per cent. And, at the same time, it signalled three rate cuts before the end of this year, despite the timing remaining uncertain. Nonetheless, SBI Research expects the RBI to begin the rate-cut cycle only in Q3 FY25.

SBI Research, in its RBI MPC preview report dated April 2, 2024, said that India is a notable exception to the otherwise regime wherein emerging economy central bank policy action is based on the advanced economy central bank rate actions.

Back home, inflation is currently being driven by food price dynamics. Looking ahead, evolving food prices will determine domestic inflation, according to the SBI Research report.

Nevertheless, core CPI declined to 3.37 per cent in February, a 52-month low, and touched levels in October 2019.

Inflation is expected to decline until July 2024 but increase thereafter to reach a peak of 5.4 per cent in September 2024, followed by a deceleration. For the whole FY25, CPI inflation is likely to average to 4.5 per cent, remaining well within the RBI’s target.

On the liquidity front, the SBI research report noted that the liquidity deficit has declined since the last policy in February. However, the impending JIT (just-in-time) mechanism will keep the government cash balances elevated going forward, and while this could harm liquidity, the spectre of capital flows in FY25 could pose challenges and opportunities for RBI liquidity management. 

Thus, temporary liquidity injections should replace temporary liquidity withdrawals, and hence, OMO cannot be a tool to counterbalance idiosyncrasies in government cash balances; only VRRR can replace them, according to the report. 

An open market operation (OMO) is the buying and selling of government securities in the open market.

On the GDP outlook, Agrawal said that they expect growth projections to continue to remain robust. Additionally, the RBI is expected to touch upon the smoothening of liquidity conditions. Systemic liquidity will improvegoing forward, Agarwal added.