RBI MPC: Is rate cut on card? Shaktikanta Das to announce soon

Speculation has grown about the possibility of a rate cut or a shift in monetary policy, especially after the US Federal Reserve delivered an unexpected 50-basis-point cut in September 2024.

In Short

• RBI MPC meeting starts amid rate cut speculation
• Inflation concerns persist despite stable CPI
• Weak domestic indicators suggest rate cut delay

The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) meeting began on Monday with economists and market analysts keenly watching for any signs of changes in the central bank’s stance. Speculation has grown about the possibility of a rate cut or a shift in monetary policy, especially after the US Federal Reserve delivered an unexpected 50-basis-point cut in September 2024.

Suman Chowdhury, Executive Director & Chief Economist at Acuité Ratings & Research, said that while market forecasters have increased expectations of a rate cut, the current environment may not be ideal for such a move. Inflation concerns, particularly around food prices, still persist despite headline Consumer Price Index (CPI) inflation staying within 4% in the last two months. Chowdhury also pointed out the impact of the escalating conflict in West Asia, particularly between Israel and Iran, which could drive global oil prices higher and add to inflation uncertainty in India.

Moreover, domestic economic indicators have shown signs of weakness. The Purchasing Managers’ Index (PMI) for September hit a multi-month low, and core sector output contracted for the first time in over 40 months. These factors suggest that the RBI may choose a "wait and watch" approach, potentially delaying any rate cuts until at least December 2024 or February 2025.

Inflation and economic growth in focus

The inflation rate in August stood at 6.83%, which, while stabilising, is still above the RBI’s target. Food inflation remains a concern, especially with the added uncertainty of fluctuating crude oil prices due to geopolitical tensions in the Middle East. Despite these risks, some analysts remain optimistic about the possibility of a future rate cut, especially given the favourable monsoon and recent developments in global monetary policy.

Anwin Aby George, a research analyst at Geojit Financial Services, highlighted that inflation dropped to 3.65% in August, falling below the 4% target. He suggested that the RBI may take advantage of this situation to implement rate cuts in the future. A lower inflation rate, combined with the US Federal Reserve’s recent rate cut, provides the central bank with an opportunity to adjust its policies and support economic growth in the long run.

Challenges ahead for RBI

Despite the optimistic outlook from some quarters, others argue that a rate cut is unlikely in the near term. Vaibhav Porwal, co-founder of Dezerv, explained that rising crude oil prices, global economic uncertainties, and domestic challenges may prompt the RBI to maintain its current policy stance.

Porwal noted that while crude prices could temporarily impact inflation, the central bank is expected to keep a close eye on inflation projections before making any changes.

Porwal also said that the RBI may revise its growth forecasts downward due to ongoing challenges, but with adequate liquidity in the banking system, there is no urgent need to adjust interest rates. The liquidity situation, according to him, allows the RBI to maintain stability in borrowing costs without making any drastic policy changes.

Balanced approach likely

Swapnil Aggarwal, Director at VSRK Capital, echoed similar views, stating that the RBI is likely to keep the repo rate unchanged at 6.50% during the October 7-9 meeting. He explained that while inflation appears to have stabilised, it is still above the central bank’s target range. Given the uncertainty around global oil prices and geopolitical issues, the RBI is expected to adopt a balanced approach, focussing on both inflation control and economic growth.

Aggarwal added that maintaining the current interest rate would provide businesses and consumers with consistent borrowing costs, supporting overall market stability. He also mentioned that a steady rate environment would benefit fixed-income markets and help preserve corporate profit margins in equity markets.

The general consensus among experts is that the RBI will likely hold its current rates steady, given the uncertain economic conditions.