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India: Goldilocks Gives Way to Constraints

• RBI cuts repo rate by 25bps to 5.25% as expected, citing exceptional disinflation (0.25% October CPI) and 8.2% growth, though maintaining a neutral stance signals easing cycle may be nearing end.
• It forecasts headline inflation to fall to 0.6% in Q3 before rebounding sharply to 2.9% and 3.9% subsequently, limiting the scope for additional rate cuts despite growth moderating from current highs.
• Durable liquidity injections alongside rate cuts acknowledge monetary transmission constraints. The consensus sees 5.25% as the terminal rate, with policy dependent on inflation normalisation and external sector stability.

RBI Holds Rates Amid Trade Headwinds

• The RBI held its repo rate at 5.5%, unanimously keeping a neutral stance as the committee assesses the impact of prior cuts amid an improved inflation outlook.
• Inflation projections were slashed to 2.6% from 3.1%, driven by GST reforms and benign food prices, creating policy space despite growth risks from 50% US tariffs.
• Domestic demand raised the growth forecast to 6.8%, but H2 FY26 faces headwinds from trade tensions. The MPC adopts a wait-and-see approach before its next move.

No Alarm From Global Cycle

• Broad increases in the flash services PMIs reinforced the signal that global activity remains resilient enough not to require forceful monetary easing.
• Residual seasonality hasn’t appeared in the PMIs again this summer, but it pollutes some unemployment data. A slight majority of countries have a higher UR than a year ago.
• Softening labour market trends from a relatively neutral cyclical position are consistent with gradual and limited rate cuts, even if they need reversing without a recession.

By Philip Rush

India CPI Inflation 4.75% y-o-y (consensus 4.9%) in May-24

- India’s CPI inflation for May 2024 stood at 4.75% y-o-y, below the consensus forecast of 4.9%, marking the lowest growth since May 2023.
- Slowing CPI inflation and subdued wholesale price movements, particularly in the manufacturing sector, suggest a potential easing of inflationary pressures, offering economic relief and implications for monetary policy adjustments.