India Central Bank Policy Stance Shift To Neutral Opens Door For Rate Cuts

(RTTNews) - The Reserve Bank of India maintained its interest rate for the tenth straight meeting on Wednesday, and shifted its monetary policy stance to neutral, paving the way for the first interest rate cut in four years as inflation is expected to moderate.

The RBI Monetary Policy Committee, led by Governor Shaktikanta Das, voted 5-1 to keep the policy repo rate unchanged at 6.50 percent.

New MPC member Nagesh Kumar voted to reduce the policy repo rate by 25 basis points. The repo has been at 6.50 percent since February 2023.

The central bank had lowered rates last in May 2020, when the repo rate was reduced by 40 basis points to 4.00 percent.

The rate-setting body unanimously decided to change the monetary policy stance from the "withdrawal of accommodation" to "neutral" and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete, the bank said.

Policymakers observed that the domestic growth outlook remained resilient underpinned by private consumption and investment. This provides headroom for monetary policy to focus on the goal of attaining a durable alignment of inflation with the target.

They said enduring price stability strengthens the foundations of a sustained period of high growth. After a transient spike in the near-term, headline inflation is forecast to moderate.

Das said headline inflation is on a downward trajectory, though its pace has been slow and uneven. The slowdown in headline inflation is expected to reverse in September and likely to remain elevated in the near-term due to adverse base effects, among other factors, he added.

Food inflation pressures could see some easing later in this financial year. But he cautioned that adverse weather events continue to pose contingent risks to food inflation. On the other hand, core inflation appeared to have bottomed out, Das noted.

The CPI inflation for 2024-25 is projected at 4.5 percent, unchanged from the previous outlook. The bank retained its real GDP growth projection for 2024-25 at 7.2 percent.

A less hawkish tone in RBI's communication strengthens the view that the easing cycle will begin in December, Capital Economics' economist Shilan Shah said. The economist expects 100 basis points of cuts in the upcoming cycle, taking the repo rate down to 5.50 percent before the end of 2025.