The Reserve Bank of India-led Monetary Policy Committee (MPC) on Wednesday retained repo rate, the key lending rate, at 6.5%. The decision wasn't unanimous as one of the members wanted a rate cut. However, what Governor Shaktikanta Das' team was in complete agreement about was the need to chane their stance to neutral from focus on withdrawal of accommodation.
Now, the big question to many is with five members still opting to keep the key rate same and all agreeing to change the stance, what will the future meetings hold. Is a surprise coming from the next time?
"While the MPC decided to keep rates on hold, it changed the policy stance to neutral. This was on the back of favourable inflation and growth dynamics. The Governor reemphasised the progress made on getting inflation back on target, while also addressing the need for caution. We believe that the change in stance is a prelude to monetary easing, however a rate cut seems unlikely in Dec’24. We see the possibility of a rate cut in Feb’24, when there is more clarity on the inflation trajectory," said Aditi Gupta, Economist at Bank of Baroda.
Aditi Nayar, Chief Economist at ICRA, stated that the MPC's decision to shift to a neutral stance was a prudent move that aligns with expectations and prioritizes flexibility. This change paves the way for a possible rate cut in December 2024, provided that the potential inflation risks, both domestic and global, do not materialize. Nayar noted that the Indian rate cut cycle is likely to be modest, anticipating a total reduction of 50 basis points over two policy reviews.
Why did the RBI change it stance?
Considering the balanced inflation and growth trends, Shaktikanta Das announced the MPC's shift from "withdrawal of accommodation" to "neutral." This change allows the MPC greater flexibility while maintaining focus on aligning inflation with the target without compromising growth. The neutral stance enables the MPC to monitor inflation trends as disinflation remains incomplete. Ongoing risks, including global geopolitical tensions, market volatility, unpredictable weather, and rising food and metal prices, necessitate vigilance regarding inflation risks. Consequently, the committee opted to keep the repo rate unchanged at 6.50% during this meeting.
"The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete," Shaktikanta Das said.
Das said domestic growth continues to gain momentum, driven by strong private consumption and investment. This resilient growth allows the RBI to prioritise inflation, ensuring it steadily declines to the 4 percent target. Given these conditions, the MPC chose to stay vigilant regarding the changing inflation outlook in the coming months. Considering the current inflation and growth trends, the MPC deemed it suitable to shift to a "neutral" stance, maintaining a clear focus on aligning inflation with the target while also supporting growth.
So, what's next from RBI?
Dharmakirti Joshi, Chief Economist at CRISIL, said the shift to neutral stance while keeping the policy rate unchanged is a cautious approach that indicates a potential rate cut in December. Joshi said that high food inflation is a significant concern, although non-food inflation remained well below trend at 2.3% in the first five months of the fiscal year. He expects a 25-basis-point reduction in the repo rate during the December meeting, as food inflation is expected to decline, and GDP growth is projected to moderate to 6.8%.
Rajani Sinha, Chief Economist at CareEdge said by changing its stance, the MPC has created the flexibility to lower rates in the future, based on how domestic and global conditions affect CPI inflation.
"We feel that there are chances of a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the March policy, provided food inflation moderates," she said.
The RBI's decision to maintain rates while adopting a neutral stance aligns perfectly with expectations, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank said.
Bhardwaj continues to anticipate the beginning of rate easing in December, with a potential cut of 25 basis points. However, she cautioned that the extent of easing in this cycle is likely to be limited, suggesting there will be minimal scope for consecutive cuts in each policy review.
Anu Aggarwal, Head of Corporate Banking at Kotak Mahindra Bank, stated that the RBI's transition to a "neutral" stance represents a crucial move in its strategy, allowing greater flexibility to adapt to changing economic conditions. She noted that the easing of food inflation and favorable monsoon conditions signal optimism for India's inflation outlook. Additionally, global trends, including the US Federal Reserve's rate cut and easing monetary policies, reinforce this shift. By adopting a more neutral position, the RBI is preparing to respond effectively to future developments while promoting economic stability and long-term business confidence.
Now, the big question to many is with five members still opting to keep the key rate same and all agreeing to change the stance, what will the future meetings hold. Is a surprise coming from the next time?
"While the MPC decided to keep rates on hold, it changed the policy stance to neutral. This was on the back of favourable inflation and growth dynamics. The Governor reemphasised the progress made on getting inflation back on target, while also addressing the need for caution. We believe that the change in stance is a prelude to monetary easing, however a rate cut seems unlikely in Dec’24. We see the possibility of a rate cut in Feb’24, when there is more clarity on the inflation trajectory," said Aditi Gupta, Economist at Bank of Baroda.
Aditi Nayar, Chief Economist at ICRA, stated that the MPC's decision to shift to a neutral stance was a prudent move that aligns with expectations and prioritizes flexibility. This change paves the way for a possible rate cut in December 2024, provided that the potential inflation risks, both domestic and global, do not materialize. Nayar noted that the Indian rate cut cycle is likely to be modest, anticipating a total reduction of 50 basis points over two policy reviews.
Why did the RBI change it stance?
Considering the balanced inflation and growth trends, Shaktikanta Das announced the MPC's shift from "withdrawal of accommodation" to "neutral." This change allows the MPC greater flexibility while maintaining focus on aligning inflation with the target without compromising growth. The neutral stance enables the MPC to monitor inflation trends as disinflation remains incomplete. Ongoing risks, including global geopolitical tensions, market volatility, unpredictable weather, and rising food and metal prices, necessitate vigilance regarding inflation risks. Consequently, the committee opted to keep the repo rate unchanged at 6.50% during this meeting.
"The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete," Shaktikanta Das said.
Das said domestic growth continues to gain momentum, driven by strong private consumption and investment. This resilient growth allows the RBI to prioritise inflation, ensuring it steadily declines to the 4 percent target. Given these conditions, the MPC chose to stay vigilant regarding the changing inflation outlook in the coming months. Considering the current inflation and growth trends, the MPC deemed it suitable to shift to a "neutral" stance, maintaining a clear focus on aligning inflation with the target while also supporting growth.
So, what's next from RBI?
Dharmakirti Joshi, Chief Economist at CRISIL, said the shift to neutral stance while keeping the policy rate unchanged is a cautious approach that indicates a potential rate cut in December. Joshi said that high food inflation is a significant concern, although non-food inflation remained well below trend at 2.3% in the first five months of the fiscal year. He expects a 25-basis-point reduction in the repo rate during the December meeting, as food inflation is expected to decline, and GDP growth is projected to moderate to 6.8%.
Rajani Sinha, Chief Economist at CareEdge said by changing its stance, the MPC has created the flexibility to lower rates in the future, based on how domestic and global conditions affect CPI inflation.
"We feel that there are chances of a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the March policy, provided food inflation moderates," she said.
The RBI's decision to maintain rates while adopting a neutral stance aligns perfectly with expectations, Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank said.
Bhardwaj continues to anticipate the beginning of rate easing in December, with a potential cut of 25 basis points. However, she cautioned that the extent of easing in this cycle is likely to be limited, suggesting there will be minimal scope for consecutive cuts in each policy review.
Anu Aggarwal, Head of Corporate Banking at Kotak Mahindra Bank, stated that the RBI's transition to a "neutral" stance represents a crucial move in its strategy, allowing greater flexibility to adapt to changing economic conditions. She noted that the easing of food inflation and favorable monsoon conditions signal optimism for India's inflation outlook. Additionally, global trends, including the US Federal Reserve's rate cut and easing monetary policies, reinforce this shift. By adopting a more neutral position, the RBI is preparing to respond effectively to future developments while promoting economic stability and long-term business confidence.
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