At the October 9, 2024, meeting of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), the central bank decided to keep the repo rate unchanged at 6.5%, marking the 10th consecutive time it has done so. This decision reflects the RBI’s cautious approach, balancing the need to control inflation while supporting growth. However, in a shift, the policy stance was changed from “withdrawal of accommodation” to “neutral,” allowing the RBI more flexibility in future policy decisions.
The RBI highlighted concerns over elevated inflation, particularly due to rising food prices, and projected India’s GDP growth at 7.2% for FY25. The central bank expects inflation to moderate by Q4.
Key Highlights:
Neutral Policy Stance:
The shift to a neutral stance signals a balanced approach, allowing the RBI to either increase or reduce rates based on future economic data. This flexibility acknowledges the persistent challenges posed by global economic conditions, commodity prices, and inflation pressures.
Inflation Projections:
Despite easing in recent months, inflation remains elevated, with food price volatility and commodity price risks driving concerns. The RBI projects inflation at 4.5% for FY25, with potential spikes in the short term before moderating in the final quarter of the fiscal year. Headline inflation had eased to 3.6% in July and 3.7% in August but is expected to rise due to higher food prices.
GDP Growth Outlook:
The RBI maintained its GDP growth forecast for FY25 at 7.2%, reflecting optimism about the economy’s performance despite global headwinds. Growth is supported by strong private consumption, robust investment activity, government infrastructure initiatives, and healthy bank credit growth. The RBI projects GDP growth of 7.4% for Q3 and Q4 FY25.
Risks and Caution:
Rising crude oil prices, geopolitical uncertainties, and global economic volatility are significant risks to inflation and growth. The central bank also noted that while domestic growth remains resilient, external factors could pose challenges in the coming months.
MPC Voting:
The decision to hold rates was supported by **five out of six MPC members**, with one member advocating for a 25 basis point rate cut. However, all members voted in favor of changing the policy stance to neutral.
Commentin on MPC meeting outcome Umeshkumar Mehta, CIO, SAMCO Mutual Fund said:“Predictability in RBI’s MPC decision of keeping our repo rate unchanged for the 10th consecutive time may be more from a position of maintaining status quo and not moving any factors given that our macros of growth and inflation are very well under control. This decision to wait and watch after the Fed cutting rates may also be because of the escalation in geo-political issues and increase in the US bond yields. Therefore, going forward too, there could be a divergence in stance to other economies, if the geopolitical issues escalate further or there is a change in stance from other economies”
Implications and Future Outlook:
The RBI’s cautious tone reflects its focus on maintaining price stability while fostering economic growth. Although inflationary pressures persist, particularly due to volatile food prices and rising global commodity costs, the central bank expects a more favorable crop outlook to ease food inflation in the coming months.
The shift to a neutral stance also indicates that the RBI is preparing for potential rate cuts in the future if inflation trends downward and economic conditions stabilize. Economists expect that the first rate cut could come in December 2024, with a modest reduction of 25 basis points. However, the scale of easing in this cycle is likely to be limited.
The next RBI MPC meetings are scheduled for December 4-6, 2024 and February 5-7, 2025, where further developments in inflation and growth will guide policy decisions.
The RBI’s decision to maintain the repo rate while adopting a neutral policy stance underscores the delicate balance between controlling inflation and supporting growth. As inflationary pressures ease, the central bank has left room for future policy adjustments. However, external risks, including geopolitical tensions and global economic volatility, will remain key factors influencing future monetary policy decisions.