On Wednesday, the Reserve Bank of India (RBI) maintained its interest rate for the tenth consecutive meeting, while adjusting its monetary policy stance to neutral—potentially signaling the first interest rate cut in four years as inflation is projected to moderate.
The RBI's Monetary Policy Committee (MPC), chaired by Governor Shaktikanta Das, voted 5-1 to keep the policy repo rate steady at 6.50 percent. Nagesh Kumar, a new member of the MPC, cast the lone dissenting vote in favor of a 25 basis points reduction in the repo rate, which has remained at 6.50 percent since February 2023.
The central bank last reduced rates in May 2020, cutting the repo rate by 40 basis points to 4.00 percent. In a unanimous decision, the rate-setting body altered its monetary policy stance from "withdrawal of accommodation" to "neutral," with the aim of sustaining inflation alignment to target while fostering growth.
This shift in stance grants the MPC greater flexibility and allows it to closely oversee ongoing disinflation efforts, which the bank acknowledges are still incomplete.
Policy authorities noted the resilience in domestic growth, driven by private consumption and investment, providing the monetary policy leeway to focus on its inflation alignment objective. They emphasized that sustained price stability fortifies the foundation for a prolonged period of robust growth. Following a temporary rise, headline inflation is anticipated to ease.
Governor Das remarked that headline inflation is on a declining path, albeit slow and inconsistent. A reversal in this slowdown is anticipated in September, with the likelihood of short-term elevation due to adverse base effects and other factors. Food inflation may ease later this fiscal year, but adverse weather conditions continue to pose potential risks. Conversely, Das observed that core inflation appears to have bottomed out.
For 2024-25, the Consumer Price Index (CPI) inflation is projected at 4.5 percent, mirroring previous forecasts. The prediction for real GDP growth in 2024-25 remains unchanged at 7.2 percent.
According to Shilan Shah, an economist at Capital Economics, the RBI's less hawkish communication suggests an easing cycle could commence in December. Shah anticipates a cumulative 100 basis points cut in the forthcoming cycle, which would lower the repo rate to 5.50 percent by the end of 2025.
