RBI Monetary Policy Meeting Highlights: RBI keeps repo rate unchanged, changes stance to neutral; Shaktikanta Das says India’s growth story intact

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers provides his outlook on the possibility of a rate cut by RBI in the coming reviews:

In line with our expectations, the central bank, in its latest meeting, kept rates unchanged by a majority of 5 to 1, while the committee unanimously decided to change its stance on liquidity to neutral. The Governor highlighted that, while they have gained greater confidence in achieving the final stage of disinflation, they will remain focused on the inflation target while supporting growth. This comes as the RBI continues to express confidence in India’s growth prospects, keeping the annual GDP growth forecast unchanged, despite revising its Q2 FY25 projection lower from 7.2% to 7%.

On the inflation front, the central bank again kept its full-year forecast unchanged at 4.5%, but revised its Q2 forecast lower to 4.1% from 4.4%. It highlighted that the favorable base effects, which brought inflation lower in June-August 2024, would be reversed in September 2024, while higher food inflation momentum would also push headline inflation higher in the near term. However, better Kharif sowing, higher reservoir levels, and improved soil moisture mean that rabi sowing is also likely to improve, leading to lower food inflation towards the end of the current fiscal year.

While the overall outlook for both inflation and growth remains positive, upside risks are emerging from evolving geopolitical tensions in the Middle East, as well as unexpected weather shifts—both of which are tail risks that the central bank continues to monitor. The improved balance between growth and inflation has warranted a change in the stance from restrictive to neutral.

*Our Take:* The change in stance was expected. This signals the start of an easing cycle, but as Governor Das emphasized, while the inflation "horse" has been brought back into the stable, the central bank will be cautious in opening the gates, lest the horse leaps out again. The latest set of growth and inflation projections from the RBI suggest they are confident that growth will sustain. Combined with the increase in the Q3 FY24 inflation projection, this implies they are willing to maintain the current stance and may wait to see further inflation reductions later in the fiscal year.

We believe that if macro indicators continue to remain weak through October-December 2024, the probability of a rate cut in December 2024 will increase. However, if growth picks up—now that the monsoon season is over and government spending resumes—the central bank may wait until February 2025 before cutting rates.

“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,” says Umeshkumar Mehta, CIO, SAMCO Mutual Fund.

Reacting to RBI’s policy review, Dharmakirti Joshi, Chief Economist at CRISIL has said, “The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) adopted a ‘neutral’ stance but kept the policy rate unchanged. While this signals circumspection, it also underscores the likelihood of a rate cut in December.

It is obvious that high food inflation is constraining Mint Road. To be sure, non-food inflation stayed significantly below trend at 2.3% in the first five months of the current fiscal.

The outsized US Federal Reserve rate cut of 50 basis points in September marked complete and a decisive turn in monetary policy among major central banks. Yet, for emerging market peers, domestic inflation concerns are at the front and centre.

We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, in response to the expectation that food inflation will decline. We also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year.

Agricultural output is expected to improve with rains favourable during the kharif season and prospects for the rabi season improving because of better water reservoir position.

Globally, risks and uncertainties persist, with escalating tensions in the Middle East, weather uncertainties and outcome of US elections in focus. Reason why the RBI took a cautious approach and kept its powder dry.”

High frequency indicators available so far suggest that domestic economic activity continues to be steady. The main components from the supply side – agriculture, manufacturing and services – remain resilient. Agricultural growth has been supported by above normal south-west monsoon rainfall11 and better kharif sowing.

Higher reservoir levels with good moisture conditions of soil augur well for the ensuing rabi crop. Manufacturing activity is gaining on the back of improving domestic demand, lower input costs and a supportive policy environment.

Eight core industries output fell by 1.8 per cent in August on a high base. Excess rainfall also dampened production in certain sectors such as electricity, coal and cement in August.

The purchasing managers’ index (PMI) for manufacturing at 56.5 for September remained elevated. The services sector continues to grow at a strong pace. PMI services at 57.7 in September indicates robust expansion.

The MPC noted that currently the macroeconomic parameters of inflation and growth are well balanced. Headline inflation is on a downward trajectory, though its pace has been slow and uneven. Going forward, the moderation in headline inflation is expected to reverse in September and likely to remain elevated in the near-term due to adverse base effects, among other factors. Food inflation pressures could see some easing later in this financial year on the back of strong kharif sowing, adequate buffer stocks and good soil moisture conditions which are conducive for rabi sowing. Adverse weather events continue to pose contingent risks to food inflation.

Das said: The monetary policy action today reflects the MPC’s assessment that, at the current juncture, it would be appropriate to have greater flexibility and optionality to act in sync with the evolving conditions and the outlook. We stand unambiguously committed to ensure durable alignment of inflation with the target, while supporting growth. In the prevailing macroeconomic conditions and the outlook, Mahatma Gandhi’s words remain highly relevant: “When the method is good, ... Success is bound to come in the end. …”

“Today, the Indian economy presents a picture of stability and strength. The balance between inflation and growth is well-poised. India’s growth story remains intact. Inflation is on a declining path, although we still have a distance to cover. The external sector demonstrates the strength of the economy. Forex reserves are scaling new peaks. Fiscal consolidation is underway. The financial sector remains sound and resilient. Global investor optimism in India’s prospects is perhaps at its highest ever. We are, however, not complacent, especially amidst rapidly evolving global conditions,” RBI governor Shaktikanta Das said.

After assessing the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 9, 2024) decided to:

1. Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. Consequently, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

2. The MPC also decided to change the monetary policy stance to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

Saugata Bhattacharya, Professor Ram Singh, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50 per cent. Dr. Nagesh Kumar voted to reduce the policy repo rate by 25 basis points.

Stock market today: BSE Sensex and Nifty50, the Indian equity benchmark indices, opened in green and surged in trade after the RBI changed the monetary policy stance to neutral. While BSE Sensex crossed the 82,000 mark, Nifty50 was above 25,100. At 10:17 AM, BSE Sensex was trading at 82,044.76, up 410 points or 0.50%. Nifty50 was at 25,151.85, up 139 points or 0.55%.

The top BSE Sensex gainers were Bajaj Finance, SBI, Axis Bank, Tata Motors and Bajaj Finserv. The top losers were Nestle India, ITC, HUL, JSW Steel and NTPC.

CPI inflation for 2024-25 is projected at 4.5%, with Q2 at 4.1%, Q3 at 4.8%, and Q4 at 4.2% CPI inflation. For W1 of next financial year, CPI is projected at 4.3%. The risks are evenly balanced.

Shaktikanta Das announced the real GDP growth for2024-25 is projected at 7.2% with Q2 at 7%, Q3 at 7.4% ,and Q4 at 7.4% . The real GDP growth for Q1 of next financial year, that is 2025-26 is projected at 7.3%. The risks are evenly balanced.

RBI governor Shaktikanta Das said, “The global economy has remained resilient since the last meeting of the MPC in August, although downside risks from increasingly intense geopolitical conflicts, geo-economic fragmentation, financial market volatility and elevated public debt continue to play out, manufacturing is showing signs of slowdown while while services activity is holding up, world trade is exhibiting.”

“Domestic growth has sustained its momentum with private consumption and investment growing in tandem. The resilient growth gives us the space to focus on inflation so as to enable its durable descent to the 4% target. In these circumstances, the MPC decided to remain watchful of the evolving outlook in the coming months, keeping in view the prevailing inflation and growth conditions and the outlook,” Shaktikanta Das said.

The marginal standing facility that is the MSF rate and the bank rate, stand at 6.75%. Further, the MPC decided unanimously to change the stance, that is the stance of the monetary policy to neutral and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

The MPC noted that currently, the macroeconomic parameters of inflation and growth are well balanced. Headline inflation is on a downward trajectory, though its space has been slow and uneven. Going forward, the moderation in headline inflation is expected to reverse in September and likely to remain elevated in the near term due to adverse base effects, among other factors, food inflation pressures could see some easing later in the financial year, on the back of strong sowing, adequate buffer stocks and good soil moisture, conditions which are conducive for rubbish sowing, adverse weather events continue to pose contingent risks to food inflation, core inflation, on the other hand, appears to have bottomed out.

RBI MPC Meet Live: "The Monetary Policy Committee, with three new external members, met on seventh, eighth and ninth, October, and after assessing the evolving macroeconomic and financial conditions and the outlook, the MPC decided by A majority of five out of six members to keep the policy repo rate unchanged at 6.5%," said RBI governor Shaktikanta Das.

RBI MPC Meet Live: Experts believe that the Reserve Bank is unlikely to reduce the key interest rate in its upcoming bi-monthly monetary policy review. The primary reasons behind this stance are the persisting concerns over retail inflation and the potential escalation of the Middle East crisis, which could significantly impact the prices of crude oil and other commodities.

RBI has kept the repo or short-term lending rate unchanged at 6.5 per cent since February 2023, and according to industry analysts, any relaxation in the rates is likely to occur only in December. The central bank remains cautious in its approach, closely monitoring the domestic and global economic factors that could influence its decision on interest rates.

The Reserve Bank's rate-setting panel, known as the Monetary Policy Committee (MPC), was recently reconstituted by the government earlier this month. The newly formed committee, which includes three freshly appointed external members, began its first meeting on Monday. The outcome of the three-day deliberation will be announced by the MPC Chairman and RBI Governor Shaktikanta Das today at 10:00 AM.

Continuing food price shocks slowed the process of disinflation in Q1:2024-25. There is also considerable divergence between headline and core inflation. This has brought to the fore the issue of how much importance should the MPC give to food inflation. Let me dwell upon this in some detail.

First and foremost is the fact that our target is the headline inflation wherein food inflation has a weight of about 46 per cent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation. Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably.

Second and equally important is the reality that high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation. Household inflation expectations, after witnessing a moderating trend between May 2022 and September 2023, have edged up on the back of high food inflation since November 2023. Persistently high food inflation and unanchored inflation expectations – if they materialise – could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations. This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. Third, these behavioural changes can then result in overall inflation becoming sticky, even after food inflation recedes.

The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so. It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.

In the months of August and September, the Indian banking system experienced a substantial daily average surplus liquidity, with figures reaching Rs 1.5 lakh crore and Rs 1.29 lakh crore, respectively. These calculations exclude seven days in September when the system faced a deficit. The month of July also witnessed a significant average surplus of Rs 1.34 lakh crore, as revealed by an examination of data from the central bank.

The global interest rate environment has recently become more conducive for the Reserve Bank of India (RBI), following a 50 basis point rate reduction by the US Federal Reserve last month. This move was accompanied by similar rate cuts implemented by the Bank of England and the European Central Bank in recent months.

Although the RBI has emphasized that its decisions are primarily influenced by domestic inflation factors, the rate cuts in advanced economies have resulted in a broader interest rate differential between India and these nations. "A wider interest rate differential plays an important role in the rupee exchange rate, with a shrinking gap typically leading to weakness in the local currency."

Experts foresee a shift in the monetary policy stance from the present position of withdrawing accommodation to a neutral one. They have observed the Reserve Bank of India's acceptance of excess liquidity in the banking system, interpreting it as a willingness to allow marginally more relaxed financial conditions while maintaining the current benchmark policy rate.

The central bank has allowed surplus liquidity conditions to prevail since July, with the exception of a brief period in September when quarterly advance tax payments temporarily drained funds from the system. This decision comes in the context of credit growth surpassing deposit growth and substantial foreign investments in Indian debt securities.

The Monetary Policy Committee (MPC) is also unlikely to reduce interest rates due to the recent surge in violence in West Asia, which has led to supply chain disruptions and increased risks to global commodity prices, in addition to the need to ensure a sustained decline in inflation. Over the past week, crude oil prices have risen by more than 5% as a result of the conflict in West Asia.

According to Reuters, Brent crude prices were up 5.03%, at $77.62 a barrel, amid concerns that the escalation could lead Iran to block the Strait of Hormuz, a crucial logistical choke point through which "a fifth of daily oil supply passes."

The rise in crude oil prices is detrimental to India's domestic trade and inflation, as the country heavily relies on imported oil. Consequently, the MPC is expected to maintain a cautious approach and refrain from lowering interest rates until the situation stabilizes and the inflation decline is sustained.

RBI MPC Meet Live: Madan Sabnavis, the chief economist at Bank of Baroda, believes that the current high inflation rates will continue for the upcoming months. He said, "I think we can all agree that high inflation has persisted and will remain there for the next few months."

Given the ongoing war and persistent inflation, Sabnavis suggests that any changes in the interest rate and monetary policy stance would be premature at this point. However, he notes that the central bank's forecasts on inflation will be of particular interest, especially whether they maintain their prediction of 4.5% inflation for the following year.

RBI MPC Meet Live: Despite a recent decline in headline retail inflation, with the August CPI reading at 3.65%, economists believe that an anticipated increase in the price gauge for September will hinder the RBI from following the lead of central banks in certain advanced economies and lowering interest rates.

The MPC's target for headline retail inflation is 4%, with a tolerance band of 2 percentage points on either side of that. The central bank has been grappling with elevated food inflation for more than a year, primarily due to weather-related disruptions and supply side challenges.

RBI MPC Meet Live: As the MPC convenes with three new external members, the key focus isn't just on interest rate cuts or monetary policy stance, but rather on the liquidity and deposit crunch that banks are grappling with. The RBI is expected to place a higher priority on maintaining financial stability over broader macroeconomic concerns.