The Crossbill News Desk
The Reserve Bank of India (RBI) decided to keep its key interest rate steady on Wednesday (October 9), maintaining the benchmark repurchase or repo rate at 6.5% for the tenth consecutive policy meeting.
However, in a notable shift, the RBI's monetary policy committee altered its stance from 'withdrawal of accommodation' to 'neutral'—the first such change since June 2019—indicating a potential path toward future rate cuts in light of a slowing economy, news agency PTI reported.
The committee, which included three RBI officials and three new external members, voted five-to-one in favour of this decision. While the repo rate remains unchanged, RBI Governor Shaktikanta Das emphasized the committee's commitment to aligning inflation with its target while supporting economic growth. He expressed optimism that food inflation may decline in the upcoming months, though core inflation—which excludes volatile food and energy prices—appears to have stabilized.
The RBI's outlook on India's economic growth remains positive, with expectations of rising private consumption and investment. This change in policy stance hints at a possible interest rate cut in future MPC meetings, with the next scheduled for early December. The RBI is joining a global trend as other central banks, including the U.S. Federal Reserve, have begun easing rates.
Annual retail inflation dipped below the RBI's target of 4% for the second month in a row in September. The central bank has maintained its inflation forecast for the fiscal year 2024-25 at 4.5% and its GDP growth forecast at 7.2%. Das noted that the current inflation-growth balance has created an environment conducive to shifting the monetary policy stance, reflecting increased confidence in the trajectory of disinflation.
The RBI also pointed to geopolitical risks and weather-related shocks that could negatively affect commodity prices, particularly crude oil, where India's import reliance is significant.
"Inflation is on a declining path, although we still have a distance to cover. We are, however, not complacent, especially amidst rapidly evolving global conditions." Das remarked during a televised announcement.
The MPC's decision is a response to the need for flexibility in its monetary policy, allowing for adjustments as economic conditions evolve. Suman Chowdhury, Chief Economist at Acuité Ratings & Research, suggested that while no clear guidance on rate cuts was provided, a reduction could occur in December or February 2025, contingent on stable inflation and a consistent alignment with the 4.5% target.
Aditi Nayar, Chief Economist at ICRA Ltd, echoed this sentiment, noting that the MPC's review prioritized flexibility and paved the way for a potential rate cut in December, provided inflation risks do not materialize. Nayar anticipated a relatively shallow rate cut cycle of about 50 basis points over two policy reviews.
Das also issued a cautionary note regarding the non-banking financial company (NBFC) sector. He highlighted the aggressive growth in certain asset classes, particularly in the microfinance sector, which could pose risks to financial stability. The RBI is closely monitoring potential stress in unsecured loan segments, including consumer loans, microfinance, and credit card debts, and may take necessary measures to mitigate these risks, PTI reported.
In other announcements, the RBI revealed plans to double the pre-transaction limit in UPI123Pay (for feature phones) to Rs 10,000, increase the UPI Lite wallet limit from Rs 2,000 to Rs 5,000, and double the per-transaction limit to Rs 1,000.
However, in a notable shift, the RBI's monetary policy committee altered its stance from 'withdrawal of accommodation' to 'neutral'—the first such change since June 2019—indicating a potential path toward future rate cuts in light of a slowing economy, news agency PTI reported.
The committee, which included three RBI officials and three new external members, voted five-to-one in favour of this decision. While the repo rate remains unchanged, RBI Governor Shaktikanta Das emphasized the committee's commitment to aligning inflation with its target while supporting economic growth. He expressed optimism that food inflation may decline in the upcoming months, though core inflation—which excludes volatile food and energy prices—appears to have stabilized.
The RBI's outlook on India's economic growth remains positive, with expectations of rising private consumption and investment. This change in policy stance hints at a possible interest rate cut in future MPC meetings, with the next scheduled for early December. The RBI is joining a global trend as other central banks, including the U.S. Federal Reserve, have begun easing rates.
Annual retail inflation dipped below the RBI's target of 4% for the second month in a row in September. The central bank has maintained its inflation forecast for the fiscal year 2024-25 at 4.5% and its GDP growth forecast at 7.2%. Das noted that the current inflation-growth balance has created an environment conducive to shifting the monetary policy stance, reflecting increased confidence in the trajectory of disinflation.
The RBI also pointed to geopolitical risks and weather-related shocks that could negatively affect commodity prices, particularly crude oil, where India's import reliance is significant.
"Inflation is on a declining path, although we still have a distance to cover. We are, however, not complacent, especially amidst rapidly evolving global conditions." Das remarked during a televised announcement.
The MPC's decision is a response to the need for flexibility in its monetary policy, allowing for adjustments as economic conditions evolve. Suman Chowdhury, Chief Economist at Acuité Ratings & Research, suggested that while no clear guidance on rate cuts was provided, a reduction could occur in December or February 2025, contingent on stable inflation and a consistent alignment with the 4.5% target.
Aditi Nayar, Chief Economist at ICRA Ltd, echoed this sentiment, noting that the MPC's review prioritized flexibility and paved the way for a potential rate cut in December, provided inflation risks do not materialize. Nayar anticipated a relatively shallow rate cut cycle of about 50 basis points over two policy reviews.
Das also issued a cautionary note regarding the non-banking financial company (NBFC) sector. He highlighted the aggressive growth in certain asset classes, particularly in the microfinance sector, which could pose risks to financial stability. The RBI is closely monitoring potential stress in unsecured loan segments, including consumer loans, microfinance, and credit card debts, and may take necessary measures to mitigate these risks, PTI reported.
In other announcements, the RBI revealed plans to double the pre-transaction limit in UPI123Pay (for feature phones) to Rs 10,000, increase the UPI Lite wallet limit from Rs 2,000 to Rs 5,000, and double the per-transaction limit to Rs 1,000.
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