India's central bank, the Reserve Bank of India (RBI), is expected to maintain its current interest rates in its upcoming policy meeting, scheduled for October 11, 2024. This decision comes amid a backdrop of softening economic indicators and global uncertainties.
Radhika Rao, senior economist and executive director at DBS Bank in Singapore, suggests that while the RBI may adopt a less hawkish tone, a change in stance or rates is unlikely at this juncture. The RBI, established in 1935 and currently the 27th oldest central bank globally, has been navigating complex economic terrain since its inception.
The central bank's monetary policy committee, formed in 2016, consists of six members, including three external appointees. Recently, Ram Singh, Saugata Bhattacharya, and Nagesh Kumar joined as new external members, potentially influencing future policy decisions.
India's economic landscape has been evolving rapidly. The country became the world's fifth-largest economy by nominal GDP in 2019, with its GDP growth rate averaging 6.61% from 1951 until 2023. However, recent data indicates a slowdown, with growth decelerating to 6.7% in the April-June 2023 quarter, primarily due to reduced government spending during national elections.
Despite this deceleration, India remains the fastest-growing major economy worldwide. The services sector, which contributes over 50% to the country's GDP, continues to be a significant driver of economic growth.
The RBI, which adopted inflation targeting as a monetary policy framework in 2016, faces the challenge of balancing growth and inflation. Some economists anticipate at least one dissenting voice among the newly appointed committee members to advocate for a rate cut.
"I do not think they will change their stance as yet... Both could happen concurrently when they finally bite the bullet."
The central bank's decision-making process is further complicated by recent escalations in Middle East tensions. However, Rao believes these geopolitical events are unlikely to significantly impact foreign investments in Indian government bonds.
Looking ahead, the RBI is expected to revise its growth forecast downward by 20 basis points to 7% in either the October or December policy meeting. This adjustment would account for the observed slowdown in the Indian government's capital expenditure.
As India's fiscal year, which runs from April 1 to March 31, progresses, market participants will closely monitor the RBI's bi-monthly monetary policy reviews for insights into the country's economic trajectory. The central bank's decisions will be crucial in navigating the challenges posed by global economic uncertainties and domestic growth concerns.