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Stance change sets stage for rate cut but questions remain over timing
This story was originally published at 19:54 IST on 9 October 2024
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By Pratiksha and Shubham Rana
NEW DELHI – The Reserve Bank of India's reconstituted Monetary Policy Committee Wednesday left the repo rate unchanged for the 10th meeting in a row. What did change was its stance, which finally shifted from 'withdrawal of accommodation' to 'neutral' after more than two years, opening the door for an interest rate cut as early as December, according to economists.
Interestingly, the MPC unanimously voted to loosen the stance of monetary policy even though the RBI retained its growth and inflation forecasts for the current financial year ending in March at 7.2% and 4.5%, respectively, although there were some alterations to the quarterly numbers. What may have provided confidence on the future trajectory of price increases is the expectation that CPI inflation is seen averaging 4.1% in 2025-26 (Apr-Mar)--which would be the lowest since FY19--with the projection for Jul-Sept next year pegged at 3.7%.
However, the central bank's optimism on growth and repeated warnings on near-term risks to inflation as well as uncertainties make it difficult to predict the timing of the first repo rate cut since May 2020. When asked if the change in stance should be taken as a sign that interest rates could be cut in December, Deputy Governor Michael Patra said the RBI only wants to "see off the near-term hump in inflation before even considering the next move".
Economists, though, are looking beyond the expected base effect-fuelled surge in prices in September. According to Madhavi Arora, chief economist at Emkay Global Financial Services, the change in stance has set the ground for the start of a "shallow easing cycle, possibly but not necessarily from December".
Headline retail inflation is seen rising sharply to 5.1% in September from 3.65% in August as per an Informist poll. Even the RBI's downwardly-revised forecast of 4.1% for Jul-Sept implies a September print of 5%. But as previously mentioned, inflation in subsequent quarters is seen falling appreciably.
"Listening to the governor's press conference and his views on growth, it seems to us that while the RBI has taken the first step towards monetary easing by changing the stance, there is still some reluctance to signal a rate cut in the next policy itself in December," Kaushik Das, Deutsche Bank’s chief economist for India, noted.
This reluctance, clearly, stems from the various risks enumerated by the MPC: heightened global geopolitical risks, financial market volatility, adverse weather events, and the recent uptick in global food and metal prices.
Matters are more complicated when it comes to growth. In the run-up to the policy decision, economists had expressed concern about the weakness in activity suggested by a number of high-frequency data ranging from the government's capital expenditure to retail sales of automobiles. However, the RBI has almost dismissed these worries.
"While the RBI mentioned that the balance between growth and inflation remains well-poised, we believe it fully acknowledged upside risks to inflation, while not acknowledging the downside risks to its growth forecast," HSBC economists Pranjul Bhandari and Aayushi Chaudhary said in a note.
To be fair to the RBI, it did lower its GDP growth forecast for Jul-Sept by 20 basis points to 7.0%, although it raised the same for Oct-Dec and Jan-Mar by 10 bps and 20 bps, respectively.
If growth is not a concern for the RBI, it can afford to delay rate cuts until it has sufficient clarity on prices. But if economists from outside the RBI turn out to be correct and the economy underperforms, the pressure on the MPC to ease will ratchet higher rather rapidly. With GDP data for Jul-Sept set to be released a week before the next interest rate announcement, it is safe to say the next meeting is a 'live' one. End
Edited by Akul Nishant Akhoury
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