The Reserve Bank of India (RBI) is currently facing a pivotal moment in its monetary policy as it prepares to potentially shift its stance from 'withdrawal of accommodation' to 'neutral' in October 2024. This change is anticipated to pave the way for interest rate cuts starting in December 2024, according to a recent report by Nuvama [1fd238e1]. The Monetary Policy Committee (MPC) is expected to maintain the repo rate at 6.5% for the time being, as the RBI assesses the economic landscape.
Recent economic indicators have shown signs of a slowdown, with the GDP growth for Q1 2024 recorded at 6.7%, falling short of the RBI's projection of 7%. High-frequency data, including vehicle sales, cement volumes, and fuel consumption, indicate continued sluggishness in economic activity [1fd238e1]. Furthermore, core inflation has decreased to between 3.1% and 3.3%, suggesting a reduction in pricing power among businesses, which may influence the RBI's decision-making process moving forward.
This evolving narrative comes in the context of the RBI's previous decisions to hold interest rates steady for eight consecutive meetings, with the last meeting occurring on September 2, 2024. The central bank's cautious approach has been attributed to ongoing concerns about inflation, particularly food inflation, which has been a significant factor in its policy deliberations [3c697c53].
As the RBI contemplates its next steps, it must balance domestic inflation pressures with global monetary trends. The SBI has noted that India has managed inflation better than many developed economies, which may provide some leeway for the RBI to adjust its stance [7c58cf53]. However, with the FY25 inflation estimate projected at 4.5%, above the RBI's target, the central bank's decisions will be critical in the coming months [42f0490c].
Overall, the RBI's potential shift to a neutral monetary stance reflects a response to the current economic conditions, including slower domestic demand and tightening fiscal policy. As the situation develops, the RBI's actions will be closely monitored by economists and market participants alike [1fd238e1].