Why Did the RBI Adopt a Neutral Policy? Future Predictions and Implications
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced on Wednesday that the repo rate, which serves as the key lending rate, will remain at 6.5%. However, the decision was not unanimous, as one of the committee members advocated for a rate cut. While the majority supported maintaining the current rate, all members agreed on shifting the policy stance from “withdrawal of accommodation” to a more “neutral” position.
Implications of the New Stance: What Lies Ahead?
The shift to a neutral stance has raised questions about what this change might signal for future meetings. With five members opting to keep the rate unchanged and unanimous support for a neutral stance, analysts are wondering if the MPC is setting the stage for a surprise move in the upcoming sessions.
Expert Opinions on the Change in Policy Stance
- Aditi Gupta, Economist at Bank of Baroda:
Gupta emphasized that while the MPC held rates steady, the switch to a neutral stance is indicative of favorable inflation and growth dynamics. She believes that this adjustment is a precursor to potential monetary easing. However, a rate cut is unlikely in December 2024. Gupta anticipates a rate cut in February 2024, when there is greater clarity on inflation trends. - Aditi Nayar, Chief Economist at ICRA:
Nayar noted that the shift to a neutral stance aligns with market expectations and provides the committee with greater flexibility. She sees this change as a strategic move, allowing for a possible rate cut in December 2024, contingent on the absence of domestic and global inflationary pressures. Nayar predicts that the rate cut cycle in India will be moderate, expecting a total reduction of 50 basis points over two policy reviews.
Why Did the RBI Opt for a Neutral Stance?
Governor Shaktikanta Das announced that the MPC has transitioned its stance to neutral due to a balanced view of inflation and growth. This decision allows the RBI to maintain flexibility and closely monitor inflationary trends, which remain incomplete. Various factors, such as global geopolitical tensions, volatile markets, unpredictable weather conditions, and rising food and metal prices, pose risks that the committee aims to manage.
“The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation, which is still incomplete,” Shaktikanta Das stated.
Current Economic Scenario and Growth Outlook
Governor Das highlighted that India’s domestic growth is gaining momentum, driven by robust private consumption and strong investment levels. This resilience in economic growth permits the RBI to focus on inflation, ensuring it gradually falls to the 4% target. Given these conditions, the MPC found it appropriate to adopt a neutral stance, allowing for more nuanced decisions in the coming months.
What’s Next for the RBI?
Dharmakirti Joshi, Chief Economist at CRISIL, remarked that the decision to switch to a neutral stance while keeping the policy rate unchanged reflects a cautious approach. Joshi sees a potential rate cut in December 2024. He pointed out that although non-food inflation has been relatively stable at 2.3% in the first five months of the fiscal year, high food inflation remains a concern. He expects a 25-basis-point reduction in the repo rate during the December meeting, assuming food inflation stabilizes.
Conclusion
The RBI’s move to maintain the repo rate while shifting to a neutral stance indicates that the committee is carefully balancing growth and inflation risks. While a rate cut is not imminent, analysts are eyeing the December and February meetings for potential changes, depending on how inflation trends evolve in the coming months.
