RBI decides to hold policy repo rate; changes stance to neutral | Economy & Policy News

Market participants now expect the stance change will be followed by a rate cut as early as in December, when the next policy review meeting takes place.

Five members of the MPC voted for the status quo in the policy repo rate while external member Nagesh Kumar voted for a 25 basis point reduction.

All the members were unanimous on the stance change.

While changing the stance, the MPC remained “unambiguously” focused on a durable alignment of inflation with the target while supporting growth.

All the internal RBI members were not ready for the “neutral” stance in the August policy. They were in favour of continuing with the “withdrawal of accommodation” stance.

Though the headline inflation rate is likely to remain elevated in the near term due to adverse base effects, RBI Governor Das said: “The developments since the August meeting of the MPC indicate further progress towards realising a durable disinflation towards the target. Despite the near-term upsides to inflation from food prices, the evolving domestic price situation signals moderation in headline inflation thereafter.”

The headline inflation rate was below the 4 per cent target in both July and August.

The September inflation numbers, which will be announced next week, are expected to be closer to 5 per cent.

Das, who earlier commented the elephant in the room was inflation, used another analogy, of a horse, as he said it took a lot of effort to bring the inflation horse to the stable.

“We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under a tight leash, so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses,” he said.

Notwithstanding the governor’s inflation vigil, market participants are expecting the rate-cut cycle will start as early as December, amid growth slowdown concerns.

“The latest guidance in our view sets up the next meeting in December as the one where the RBI can potentially cut rates amid slowing growth and manageable inflation,” said Rahul Bajoria, India and ASEAN economist, Bank of America.

“As the December MPC approaches, the growth slowdown in India will become apparent, as inflation aligns itself to the 4 per cent target. We expect a repo rate cut of 100 basis points by December 2025, beginning December 2024. If rate cuts are delayed or smaller, downside risks to growth would rise,” Bajoria added.

The central bank has retained FY24 growth projection at 7.2 per cent despite slowing growth as indicated by the high-frequency data.

The FY25 inflation projection has been retained at 4.5 per cent.

Standard Chartered in a note said there was a high probability of a 25 basis point cut in December if the next two consumer price inflation prints were not significantly higher than 5 per cent, and vegetable prices did not stay elevated. A repo rate cut will reduce interest rates on retail loans like home and auto as most banks have linked such loans to the policy repo rate.

“Today’s policy meeting has given us sense of three out of six members’ views on growth and inflation. One of the new members — Nagesh Kumar — voted for a cut as well as a change in stance and thus his dovish leanings are evident. The governor also sounded dovish, while DG (Michael Debabrata) Patra sounded more comfortable on the inflation trajectory,” the note added.

The yield on the benchmark 10-year government bond fell in early trade after FTSE Russell announced that it would include Indian bonds in its indices. The yields fell further to 6.74 per cent during the day before settling at 6.77 per cent after the MPC’s decision to change the stance.

The next MPC meeting has been scheduled for December 4-6. That will be the last one chaired by Das, the longest-serving RBI governor in seven decades.

First Published: Oct 09 2024 | 10:10 PM IS