US Fed Cut, Fresh Faces May Bring a 'Neutral' Twist to RBI MPC Decision

The Reserve Bank of India (RBI) has begun is three-day monetary policy committee (MPC) meeting today, on October 7, and will conclude on October 9.

In its last nine meetings, the central bank has kept the repo rate unchanged at 6.50 per cent, with an aim to curb high inflation and balance economic growth. However, this time markets are looking for signs that may indicate a shift in the RBI’s stance.

RBI Governor Shaktikanta Das is scheduled to announce the MPC decision at 10 am on October 9, followed by a press meet.

Over the next two days, the economists and markets are likely to focus on the RBI policy. While the possibility of a change in stance to neutral is on the table, the MPC may keep the repo rates unchanged at 6.50 per cent for the 10th consecutive time.

The MPC is anticipated to focus on factors such as inflation (food and fuel), global economic uncertainties (crude oil prices, Middle East tensions), and India’s economic growth prospects.

Deepak Agrawal, CIO - Debt at Kotak Mahindra AMC says with India’s consumer inflation at 3.65 per cent in August and food inflation at 5.66 per cent, factors like favorable monsoon conditions and lower global food prices could mitigate inflation pressures, suggesting the pitch is turning.

The October meeting would also be the first after the inclusion of three new members to the MPC.

Meet New MPC’s External Members

Last week, the government appointed three external members in the panel – Ram Singh, Director at Delhi School of Economics, University of Delhi; Saugata Bhattacharya, Economist and Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development. The three members will hold office for a period of four years.

They will join internal members including Chairperson Shaktikanta Das, RBI Deputy Governor Michael Patra and Executive Director of the monetary policy department of RBI Rajiv Ranjan.

The new members have replaced the previous external MPC members – Ashima Goyal, professor at the Indira Gandhi Institute of Development Research, Jayanth, R Varma, professor IIM-Ahmedabad, and Shashanka Bhide, senior advisor at the National Council for Applied Economic Research – whose tenures ended on October 4.

When Is RBI Expected to Cut Repo Rate?

Kapil Gupta, Executive Director – Research at Nuvama Institutional Equities says the RBI is likely to maintain the repo rate at 6.5 per cent but adopt a more neutral stance driven by a slowdown in high-frequency indicators following a weaker-than-expected Q1 GDP growth, benign core inflation, tightening fiscal policy, and the commencement of easing by the US Federal Reserve.

“We believe these conditions will create the groundwork for potential rate cuts, which could start as early as December,” Gupta said.

Despite the US Federal Reserve recently announcing a 50 bps interest rate cut, bringing its policy rate down to 4.75-5 per cent for the first time in over four years, the RBI is expected to keep the policy rates unchanged.

In his recent speeches, Governor Das has been categorically hinting at no near-term dovish view on interest rates and disassociating RBI's monetary policy from the US rate cuts. 

According to Agrawal, a rate-cut cycle may commence in December 2024, contingent on clearer insights into the harvesting season and upcoming GDP data, much like a team adjusting its strategy as conditions evolve in the middle.

Despite moderating GDP growth and a recent dip in the manufacturing PMI, the MPC is expected to maintain the current benchmark rate of 6.50 per cent while shifting its stance from “withdrawal of accommodation” to “neutral,” indicating a crucial inflection point in policy.

The latest near-term macro data remains mixed, and early signs of a slowdown are on the horizon. The inflation is nearing the government’s target of 4 per cent on a four-quarter rolling basis, the closest it has been in 22 quarters. This indicates a change in the stance to neutral from “withdrawal of accommodation” and the RBI may hint at being open for a rate cut based on the data that comes in from now till the next meeting.

However, Kanika Pasricha, chief economic advisor to the Union Bank of India says the central bank may keep its stance unchanged in October and the combination of Middle East tensions and a spike in US yields on paring of quantum of rate cut forecast from the Fed in the near-term post-strong labour market data strengthens the case further.

The tensions in the Middle East escalated after Iran fired around 181 ballistic missiles at Israel in retaliation to the war in Gaza against the Hamas of Palestine, Houthis of Yemen and Hezbollah of Lebanon.

The attacks have led to a rise in crude oil prices, but experts suggest that the impact on inflation in India will be minor. When the petroleum prices increase by $10 per barrel or higher, India’s current account deficit widens by 0.55 per cent and the CPI inflation rises by 0.30 per cent in effect. Therefore, oil prices have a deep impact on India’s inflation as it constitutes a major portion of the country’s import bill.

In August’s monetary policy, the central bank projected CPI at 4.5 per cent and real gross domestic product (GDP) at 7.2 per cent.

According to economists, the RBI is expected to announce minor downward revisions to the FY25 projections.

“We expect minor downward revisions to the RBI’s FY25 projections for CPI inflation to 4.4 per cent YoY from 4.5 per cent and GDP growth to 7.0 per cent from 7.2 per cent,” Nomura said in a report.