The benchmark interest rate will depend on future inflation trends, says RBI Governor Shaktikanta Das. He emphasized that month-on-month inflation momentum, whether increasing or moderating, is crucial for the central bank’s decisions.
“It’s not just about current inflation; we need to consider the outlook for the next six months to a year,” Das told CNBC, citing July’s revised inflation figure of 3.6% and August’s 3.7%. “We need to carefully assess the future trajectory of inflation and growth before making a decision.” This was in response to a question about when the central bank might start cutting the repo rate.
The RBI increased the repo rate by 250 basis points between May 2022 and February 2023. Since then, the six-member Monetary Policy Committee (MPC) has kept rates and stance unchanged.
Asked about the possibility of a rate cut in the upcoming policy review, scheduled for October 7-9, Das pointed out that a new MPC will be constituted, with three new external members replacing those whose tenure has ended after four years. Decisions, he said, will be made after discussions within the new committee.
On the broader economy, Das noted that India’s GDP growth momentum remains strong, apart from a temporary slowdown in government expenditure — likely due to the recent election season. He expects budgeted amounts to be spent in the coming months, allowing the government to catch up on expenditure.
The RBI is confident India will achieve 7.2% growth in 2024-25, with a sustainable long-term growth rate of 7.5% to 8%. While growth above 10% needs further analysis, Das believes the current trajectory indicates robust growth and sufficient job creation.
Das cautioned against providing forward guidance on interest rates due to the risks in an uncertain global environment. He emphasized that unforeseen geopolitical and climate-related events could disrupt expectations, making it challenging to maintain forward guidance. “It can be very risky because it applies both ways,” Das said, noting that high uncertainty and varying monetary policies and growth scenarios across countries complicate the situation. “Offering forward guidance could mislead markets. If circumstances change unexpectedly, authorities may be unable to uphold the guidance, potentially leading markets astray without positive outcomes. Therefore, forward guidance on rate hikes — such as timing and magnitude — is typically not provided.”
“Climate and weather-related developments are occurring with unprecedented suddenness, adding to the uncertainty. Additionally, countries’ monetary policies and growth scenarios are diverging,” Das said.
Regarding the RBI’s intervention in the foreign exchange market, Das stated that the central bank aims to minimize excessive volatility in the rupee, as such volatility is detrimental to the economy. While some anticipate further rupee depreciation, Das argued that these expectations overlook India’s improved economic position and significant foreign exchange inflows, particularly following its inclusion in global bond indices.
“When the financial sector fundamentals are strong, the rupee naturally strengthens. We’re not artificially maintaining its value,” Das said. “People may expect further depreciation, but they overlook the fact that the Indian economy is much stronger today.”
He also noted that there are no significant risks or concerns in the non-banking financial sector, as financial indicators like capital adequacy and gross non-performing assets (GNPA) remain stable.