News
The Reserve Bank of India's (RBI) recently reconstituted Monetary Policy Committee (MPC), which convened from October 7-9, decided to maintain the Repo rate, the key policy rate, at 6.5% for the tenth consecutive review.
Out of the six-member MPC, five members voted to keep the repo rate steady. In contrast, Nagesh Kumar, Director and Chief Executive of the Institute for Studies in Industrial Development, voted to reduce it by 25 basis points (bps).
The MPC changed its monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral.’ The panel also kept the retail inflation and GDP growth forecasts unchanged at 4.5% and 7.2% for FY 25, respectively.
Unchanged Repo rate
As the RBI has maintained the Repo rate stable at 6.5%, all External Benchmark Lending Rates (EBLR) linked to the repo rate will not increase, bringing relief to borrowers as their Equated Monthly Instalments (EMIs) will not increase.
Shaktikanta Das, RBI Governor, said September inflation is expected to experience a significant jump due to unfavourable base effects and rising food prices. He added that inflation is projected to stabilise in the fourth quarter of CY 24 but he warned against risks due to unexpected weather events and geopolitical tensions worldwide.
September’s Consumer Price Index (CPI) inflation print was estimated at 5.2% versus 3.7% in August. Less supportive base effects are mostly responsible for the increase. However, the estimates factor in a monthly increase in food prices.
The RBI has taken a prudent approach by focusing on key indicators like domestic inflation and financial stability, particularly in light of the declining individual savings as a percentage of GDP.
Monetary policy stance
The RBI’s decision to change the policy stance to neutral from the withdrawal of accommodation translates to RBI not initiating measures to reduce the money supply in the system.
However, the MPC said the policy stance will remain “unambiguously focused on a durable alignment of inflation with the target” while supporting growth.
Analysts predict RBI’s shift to a ‘neutral’ stance marks a pivotal step in its approach, providing more flexibility in navigating the evolving economic conditions. The US Federal Reserve’s rate cut and easing monetary policies further support the policy stance shift.
What’s ahead?
According to CareEdge Ratings, there are expectations that the RBI will deliver the first Repo rate cut in December 2024. “If food inflation moderates, we could see a shallow rate cut of 50 bps in the upcoming policy meetings in this fiscal year”, they added. HSBC expects Repo rate cuts of 25 bps in December and February. Additionally, Bank of America estimates repo rate cuts of 100 bps by December 2025.