Interest rates in the Indian banking system are set to remain stable as the Reserve Bank of India’s (RBI) newly reconstituted Monetary Policy Committee (MPC) has decided to keep the key policy rate, known as the repo rate, unchanged at 6.5 percent. This marks the tenth consecutive review in which the rate has remained steady.
During its recent meeting from October 7-9, the MPC shifted its monetary policy stance from ‘withdrawal of accommodation’ to ‘neutral.’ Despite this change, the committee opted to retain its forecasts for retail inflation and GDP growth at 4.5 percent and 7.2 percent, respectively, for the fiscal year 2024-25.
Reasons Behind the Unchanged Repo Rate
The decision to keep the repo rate steady came with a 5:1 majority vote. New MPC member Nagesh Kumar was the sole dissenting voice, advocating for a 25 basis point cut. RBI Governor Shaktikanta Das noted that inflation is expected to rise significantly in September due to unfavorable base effects and increasing food prices. He warned that while inflation may moderate in the fourth quarter, risks from unexpected weather events and geopolitical tensions could drive it higher.
Analysts suggest that the current economic conditions do not favor a more aggressive monetary policy easing. Suman Chowdhury, Executive Director & Chief Economist at Acuité Ratings & Research, emphasized that although consumer price index (CPI) inflation has recently been contained, concerns about food inflation persist.
Recent geopolitical conflicts, particularly escalating tensions between Israel and Iran, pose further risks of rising global oil prices, adding to the inflation uncertainty. Additionally, economic indicators are less than encouraging; for example, Purchasing Managers’ Index (PMI) figures fell to multi-month lows in September, and core sector output contracted after a 42-month streak of growth.
Changing Monetary Policy Stance
The shift in policy stance to ‘neutral’ indicates that the RBI will not take immediate measures to reduce money supply, which it had been doing since June 2022 to combat inflation while fostering growth. This new stance reflects a more flexible approach, allowing the RBI to respond to changing economic conditions while maintaining its focus on aligning inflation with target levels.
Industry experts believe that this change signifies a cautious optimism for India’s inflation outlook, especially with food inflation easing and favorable monsoon conditions. Anu Aggarwal, Head of Corporate Banking at Kotak Mahindra Bank, remarked that adopting a neutral position positions the RBI to respond dynamically to future developments.
Unchanged Inflation and GDP Projections
The MPC maintained its inflation and GDP growth forecasts due to anticipated fluctuations in food prices, driven by a production shortfall in key commodities. Governor Das highlighted that the September inflation rate is expected to rise due to base effects and increased food prices, particularly for onions, potatoes, and gram.
Despite the potential for short-term inflationary pressures, the RBI projects a moderation in inflation towards the end of the fiscal year, supported by a good kharif harvest and ample cereal stocks. Risks from international crude oil price volatility and rising food and metal prices also remain on the horizon.
Implications for Borrowers
With the repo rate steady at 6.5 percent, external benchmark lending rates tied to this rate will not increase, providing relief to borrowers as their equated monthly installments (EMIs) will remain unchanged. However, banks may adjust interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR), where not all of the previous rate hikes have been fully transmitted to consumers.
Future Expectations
Looking ahead, analysts anticipate the first repo rate cut could occur in December 2024, contingent upon the moderation of food inflation. HSBC predicts a gradual reduction of 25 basis points in December and February meetings, while Bank of America expects cumulative cuts of 100 basis points by December 2025, reflecting an outlook of slowing growth and declining inflation.
As the RBI navigates these evolving economic conditions, its careful balancing act between fostering growth and managing inflation will remain a focal point for stakeholders in the financial markets and beyond.
