The Reserve Bank of India (RBI) in a landmark policy decision has decided to keep its key lending rate, the repo rate unchanged at 6.5% for the tenth consecutive time while adopting a “neutral” stance in its monetary policy outlook. This shift from a “withdrawal of accommodation” policy stance suggests that the central bank may now be liberated to go either way-directionally-in its quest to offset prospective inflation and growth dynamics.
RBI maintains repo rate unchanged
This decision was released during the RBI’s fourth bi-monthly monetary policy review for the financial year 2024-25 (April-March). The Monetary Policy Committee (MPC) that determines repo rate kept a status quo on repo rates but commented on policy stance change to be the most critical development.
Neutralizing Stance Change
Of the six members of the MPC, five were in favor of maintaining the status quo on the repo rate. Incoming external member Nagesh Kumar dissented by suggesting a 25 basis point cut. However, all six members decided in favor of moving the policy stance to neutral.
Such a neutral stance gives the central bank more elbow room. A neutral policy gives an RBI the flexibility to either harden or soften monetary policy based on the inflation pathway. Under the “withdrawal of accommodation” stance introduced in April 2022, RBI had progressively raised the repo rate by 250 basis points from May 2022 to February 2023, looking to rein in inflation that was running amok.
The change in stance, therefore reflects the stabilizing inflation that is now within the comfort zone of RBI. This means more ease in management as it pertains to future economic stressors. “Given the current inflation and growth environment, the MPC believed that it was prudent to change the stance to neutral, whereas the objective to align inflation with the medium-term target of 4% remains, RBI Governor Shaktikanta Das said.
Inflation Focus
One of the main reasons the RBI has decided to leave rates alone is because of stabilizing inflation. If consumer price inflation had not abated following much of the last two years of inflationary pressures, it would likely have caused the RBI to raise interest rates. Consumer price inflation has stabilized at within the central bank’s legally mandated target band of 2-6%. As a result, the RBI kept its interest rates unchanged while evaluating future inflationary trends.
The governor restated that the central bank remains committed to bringing inflation under control. “Our focus remains clearly set on providing sustainable alignment of inflation with the target, all while supporting growth prospects,” he said.
Inflation data for the recent months has eased as regards inflation because of combined effects of favorable base effects with softer food and commodity prices. Global risk includes swings in global oil prices and the geopolitical effect. Holding a neutral policy stance, the RBI is ready to act in time if inflationary pressures return.
New Participants in the MPC
Three new members joined the erstwhile committee of external nominees at this week’s MPC meeting, it was the first occasion. There will be routine reshuffling among the external members of the MPC and three new members-Saugata Bhattacharya, Ram Singh, and Nagesh Kumar-became part of that. The sole dissenter when Kumar had demanded a cut in rates marked the diversity in opinions that now exist within the newly formed committee.
The remaining five members of the Central Bank’s Monetary Policy Committee voted to keep the repo rate unchanged but made it clear that moving to a neutral position provides room to maneuver and make changes as circumstances evolve.
Market Reaction
Financial markets have quickly reacted to the RBI’s policy change, but at the helm in the boat are the bond markets. The yield on India’s benchmark 10-year government bond fell seven basis points to 6.75 percent, as investors took the neutral stance in advance of a possible rate cut cycle over the next two or three months. Lower bond yield indicates increasing bond prices that signal building optimism that borrowing costs may ease later.
This did not leave the equity markets behind. The BSE Sensex edged 0.63% higher to end at 82,146.9 points, while the broader NSE Nifty 50 index also edged 0.68% higher to 25,182.2 points. Analysts attributed the uptick to expectations of a more accommodative monetary policy going forward that would support corporate earnings and economic growth.
The Indian rupee did manage to see a small gain over the US dollar, gained strength up to 83.94 per dollar from close on previous days at 83.96 per dollar; that should have been a green signal from the currency traders as well.
Economic Outlook
While most were expecting RBI to keep the repo rate, a shift to a neutral stance has been predicted by some of the market analysts. A recent Economic Times poll reveals that while most respondents expected the central bank to continue with the same policy rate, more than half had predicted the shift to a neutral stance.
Fresh off the revisions of RBI in respect of its revised outlook, India’s economy is braving headwinds-plaintive of slowing growth globally, supply chains affected supply chains affected especially commodity prices. Back home, domestic growth is robust, with strong output in the manufacturing sector and expansion in the services sector.
It should also provide the RBI with enough elbow room to play off the required growth-inflation balance in adjusting its interest rates. Economists expect the RBI could begin an easing cycle in 2024, when inflation is already under control, if worldwide growth weakens or if homegrown demand falters.
The decision by the RBI to hold the repo rate unchanged while changing its policy stance to neutral reflects cautious optimism on the part of the central bank regarding the current economic climate. Given that easing inflation and growth are sustaining at steady levels, the central bank has allowed itself the flexibility to cut or raise rates based on the direction in which the economic landscape takes in the months to come.
In this context, the central bank will be more attuned to achieving a delicate balance between supporting growth and ensuring that inflation remains anchored within the target range, keeping its door open for further rate cuts if inflationary pressures remain subdued.
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