RBI eases hawkish stance, rate cut on horizon

The Reserve Bank of India (RBI) on Wednesday, 9 October, shifted its hawkish policy stance to “neutral” for the first time in four years, during which it had focused on taming inflation.

RBI governor Shaktikanta Das said that the likely easing of food prices—which constitute about half of the Consumer Price Index (CPI)—in the coming months may improve the outlook for inflation, indicating that an interest rate cut could be around the corner.

Five of the RBI’s six-member monetary policy committee (MPC), however, voted to keep the benchmark repurchase rate at 6.5% for the 10th consecutive time.

The dissenting vote came from Nagesh Kumar, one of the three newly appointed external members, who advocated for a 25 bps cut in the repo rate.

The interest rate-setting monetary policy panel, which has three new external members, met on 7-9 October.

Bonds rose, along with stocks, following the RBI’s announcement, while the rupee was little changed.

RBI’s change in stance from “withdrawal of accommodation” to “neutral” comes after the US Federal Reserve last month lowered interest rates by an outsized 50 basis points (bps), easing monetary policy for the first time in four years. One basis point is one-hundredth of a percentage point.

“The standing deposit facility (SDF) rate remains at 6.50% and the marginal standing facility (MSF) rate and the bank rate at 6.75%, Das said.

The MPC unanimously decided to change the stance to neutral, “and remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth,” he said.

“With the change in stance, the MPC has given itself the flexibility to cut rates going forward, depending on how the domestic and global conditions pan out for CPI inflation,” Rajani Sinha, chief economist at rating agency CareEdge, said.

“Today’s MPC review prudently prioritized flexibility, by changing the stance to neutral, in line with our expectations,” Aditi Nayar, chief economist and head of research and outreach at ICRA Ltd, said.

Samantak Das, chief economist and head of research and real estate information services for India at consultant JLL, said the RBI’s monetary policy announcement is an “early indicator” of the change in the interest rate policy, going forward.

“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,” Das said.

“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 amid rapidly evolving global conditions,” he added.

CareEdge’s Sinha said that while Das pointed to the “comfort” provided by a surplus monsoon and a healthy kharif harvest, he remained cautious of certain inflationary risks.

“Any adverse weather conditions, escalation of geopolitical conflicts and the recent sharp increase in commodity prices needs to be monitored for future inflation trajectory,” Sinha said.

“We feel 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,” Sinha said.

“While RBI remains optimistic on growth, some moderation in recent high frequency economic indicators like core sector, PMI manufacturing, GST collections, passenger car sales also give reason to look at rate cuts going forward,” she said, while adding that expectations of further rate cuts by other central banks may force RBI’s hand.

ICRA’s Nayar said the change in stance has opened the door for a potential rate cut in December, and added that “the Indian rate cut cycle will be fairly shallow, restricted to 50 bps over two policy reviews.”

JLL’s Das said RBI’s decision to maintain status quo on the repo rate for the 10 consecutive time reflects “a prudent and balanced approach to monetary policy.”

To be sure, Das said: “Considering the significant risks that lie ahead of us, it will not be appropriate to specifically talk of timing of rate cut.”

The RBI’s decision comes against the backdrop of easing inflation since December 2023, which has been hovering within its target band, Das said.

RBI, meanwhile, retained its growth and inflation projections for the current fiscal at 7.2% and 4.5%, respectively.

The growth outlook remains intact, Das said, with private consumption and investment growing in tandem.