Explaining the rationale behind the change in stance of the monetary policy committee (MPC), RBI Governor Shaktikanta Das said: “The prevailing and expected inflation-growth balance has created congenial conditions for a change in monetary policy stance to neutral.”
Ten-year benchmark bond yields fell 8 basis points due to the stance change and after FTSE Russell announced its decision to add Indian sovereign bonds to its emerging-market debt index. Yield on 10-year g-sec bond closed at 6.77%. One basis point is a hundredth of a percentage point.
The benchmark BSE Sensex rose 684 points soon after the RBI’s announcement, but the gauge erased gains to end 167 points lower at 81,467.
“The RBI seems to be sequencing its moves carefully, starting off with a softening of stance today,” said HSBC’s chief economist, India and Indonesia, Pranjul Bhandari. “We believe the next move will be a 25 bps rate cut in the December meeting.”The MPC kept its FY25 projections on CPI inflation and GDP growth unchanged at 4.5% and 7.2%, respectively. The first quarter consumer price index (CPI) projection for FY26 was lowered by 10 bps to 4.3%.“The developments since the August meeting of the MPC indicate further progress in realising a durable disinflation toward the target,” said the RBI governor, announcing its fourth bi-monthly policy statement for 2024-25. “Despite the near-term upsides to inflation from food prices, the evolving domestic price situation signals moderation in headline inflation thereafter,” he added.
The repo rate — or the rate at which the central bank lends to banks — will remain at 6.5%. All other rates also remain where they were. A basis point is a hundredth of a percentage point.
Das said that while factors such as adverse weather events, geopolitical tensions and the recent rise in some commodity prices posed risks to inflation, the central bank now had greater confidence in navigating the last mile of disinflation.
Attritional Battle
“It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago,” Das said. “We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under a tight leash, so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses,” he added.
Separately, the regulator asked non-banking finance companies (NBFC) to assess their exposures and underwriting standards to avoid systemic risks.
“Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality,” the governor said, warning NBFCs about the consequences of ‘imprudent growth at any cost.”
To be sure, headline inflation was below the central bank’s target of 4% for the last two readings in July and August. Yet, the RBI expects the consumer gauge print to reverse in September and remain elevated in the near-term due to adverse base effects. However, it added that core inflation appears to have bottomed out.
Five of the six members of the MPC voted to keep the repo rate unchanged, with incoming external member Nagesh Kumar voting for a rate cut of 25 basis points. This week’s MPC meeting is the first with three new external members – Saugata Bhattacharya, Ram Singh and Kumar.
All six members of the MPC voted to shift the stance of policy to neutral. In June 2019, the RBI had shifted from ‘neutral’ stance to ‘accommodation’ and later in April 2022 it moved to a stance of ‘withdrawal of accommodation’.
The shift to a neutral stance comes amid tolerance of surplus liquidity conditions for the past couple of months. System liquidity was, on average, in surplus of about Rs 1.3 lakh crore during August-September and a surplus of Rs 2.3 lakh crore up to October 7. In 2023, the central bank had taken measures such as the announcement of an incremental cash reserve ratio to drain out funds from the system whenever large liquidity surpluses had built up.
‘Resilient Growth’
Das stressed that India’s growth story remained intact.
“Resilient growth gives us the space to focus on inflation so as to ensure its durable descent to the 4 % target,” said the RBI governor.
Expressing confidence on growth prospects, Das said that rural demand was trending upwards while urban demand continued to hold firm. Investment activity remains “buoyant”, Das said, pointing to rebounding government capex, momentum in private investment, higher capacity utilisation and rising investment intentions.
Das said that the central bank would be nimble and flexible in liquidity management operations going ahead and ensure that money market rates evolve in an orderly manner.
The next MPC meeting is scheduled between December 4 and 6.