MUMBAI: Despite holding key policy rates at 6.5 percent for the tenth time on the trot, the Reserve Bank-led monetary policy committee has changed the policy stance to neutral, which has many analysts forecasting the beginning of the easing cycle sooner rather than later.
Changing the stance to neutral is the first step towards a rate cut as it has eased the relatively hawkish policy stance. This also indicates that the RBI’s strident efforts at decoupling domestic policy actions from the West has come a cropper. The US Fed did its third biggest rate cut in its history last month by slashing the federal fund rates by 50 bps for the first time in four years, while its counterparts in the EU and UK had done so a couple of times already.
The MPC has three new members for the next four years, in its third reconstitution since the inception of the inflation targeting framework in September 2016. The new MPC voted to keep the rates unchanged in a 5:1 vote, wherein the only dissenting voice was that of Nagesh Kumar, one of the three new members, who voted to slash the repo rate by 25 bps to 6.25 percent.
While holding the rates wasn’t unanimous, changing the policy stance to neutral was unanimous -- again a first since June 2019, when it had adopted a withdrawal of accommodation stance amid signs of a slowing economy.
The repo rate was last changed in February 2023 when it was hiked to 6.5 percent from 6.15 percent.
Refusing to accept the policy stance change to neutral as a pivot, governor Shaktikanta Das, who completes his five-year term on December 10, said it can be interpreted in whichever way. From being a wild elephant that need to be sent back to the forest at any cost, the inflation animal was described by him as a horse. "The significant increase in risks to inflation is unambiguous and we cannot afford to let go easy on our leash on the inflation horse, which if we are complacent can bolt again and go out of control,” he said.
“The prevailing and expected inflation-growth balance has created conditions for a shift in the monetary policy stance as there now is greater confidence on the last mile of disinflation,” he added.
He said we cannot underestimate the rising risks to inflation from the evolving geopolitical tensions in the Middle East, where the tension between Israel and its neighbors have escalated to a breaking point earlier this month. This has sent up crude prices over 18 percent to cross $80 a barrel and given the fact that India imports as much as 85 percent of fuel demand, any spike in prices can have multiple cascading impact on the economy as a whole and imported inflation in particular.
Das and his deputy Michael Patra told reporters at the customary post-policy presser that they want to see how evolving risks to the inflationary outlook play out, particularly food inflation and geopolitical tensions, before cutting the policy rate.
While there was some tweaking in quarterly estimates, GDP growth and inflation estimates for FY25 have been kept unchanged at 7.2 percent and 4.5 percent respectively.
The governor said the committee changed the stance but “will remain unambiguously focused on the durable alignment of inflation to target while supporting growth. In fact the growth-inflation dynamic is well poised forcing us not to deflect our attention from continuing the fight to tame it for a durable time.”
Food inflation, he said, may ease in coming months, while the core inflation, which excludes the volatile food and energy costs, appears to have bottomed out.
Patra chipped in saying, “We have to ensure that the possible sharp spike in September and October is seen off well. Once we are done with that, we can look at a rate cut.”
On retaining GDP outlook at 7.2 percent, Das said the economic growth outlook remains intact, with private consumption and investment growing in tandem. "Even after the mild slowdown in the manufacturing and services PMIs, our PMIs are the highest in the entire world. And such a variation for a month is not something we are worried about now," he said.
Annual retail inflation eased below the central bank's target of 4 percent for a second consecutive month in September, but the RBI expects a major rebound this month and the next, largely due to base effects and hopes it will begin to fall again from November leading it to maintain its CPI forecast unchanged at 4.5 percent for the fiscal.
"Inflation is on a declining path for sure, although we still have a distance to cover. We are, however, not complacent, especially amidst rapidly evolving global conditions. MPC's assessment at the current juncture, means 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," Das told reporters and also in his televised address unveiling the policy announcement.
Meanwhile, on the regulatory front, the RBI said it has extended the ban on foreclosure charges to loans taken by MSMEs and also microfinance borrowers—from the mortgages now.
Coming down again on non-bank players, the RBI has warned of stern action if corrective measures are not taken to address its concerns on arresting the aggressive growth push in some of their asset classes and specifically in the microfinance sector saying this can pose risks for financial stability going forward.
Das also said the RBI is closely monitoring the likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, microfinance loans and credit card outstanding.
"Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality. Their underwriting standards and post-sanction monitoring have to be robust," Das said, calling for continued attention to potential risks from inoperative deposit accounts, cybersecurity landscape and mule accounts.
Other measures announced include doubling of the pre-transaction limit in UPI feature phones to Rs 10,000 and an increase in the UPI Lite wallet limit to Rs 5,000 from Rs 2,000 and a doubling of per transaction limit to Rs 1,000.
Reacting to the change in the policy stance to neutral, Aditi Nayar, chief economist at Icra Ratings, said, “The MPC review prudently prioritised flexibility by changing the stance, thus opening the door for a potential rate cut in December if the lurking risks to inflation, both domestic and global, do not materialise. In our view, the rate cut cycle will be fairly shallow, restricted to 50 bps over two policy reviews."
Suman Chowdhury, chief economist at Acuité Ratings, concurred, saying, “It is likely that the MPC will go for a rate cut in December or February, provided the inflationary environment is stable and the headline inflation is consistently within 4.5 percent in the next few months.”
