MPC poll: RBI may maintain status quo in Oct policy, likely to change stance to neutral in Dec

Post the Fed rate cut, certain emerging market central banks have reduced their respective policy rates, and there is hope in certain pockets that the Reserve Bank of India too may follow the Fed. We, however, do not anticipate a change in the policy rate or in stance

The upcoming monetary policy committee (MPC) meeting of the Reserve Bank of India (RBI) is expected to keep policy repo rate unchanged, as the growth-inflation risks have not yet dramatically turned, according to the Moneycontrol’s poll of 12 economists, bankers and fund managers. The meeting will start on October 7 and the central bank's key decision on interest rate will be known on October 9.

“Relatively stronger domestic growth conditions provide the RBI the head room to wait for further clarity on food inflation risks,” said Gaura Sen Gupta, Economist, IDFC First Bank.

Experts are equally divided about their views on the likely outcome of the MPC meeting. A section voted for a change in stance to "neutral", while the rest said the central bank will stick to its "withdrawal of accommodation" position.

"Neutral" suggests that the RBI can cut or increase interest rate.  Typically, this position is adopted when the policy priority is equal on both fronts — inflation and growth.

However, the expectation of a change in stance and an interest rate cut in the next quarterly monetary policy meeting — to be held in December — looms large. The sentiment abounds after US Federal Reserve effected a 50 basis points (bps) rate cut in September. Also, the consumer price index (CPI) has consistently remained lower than the target level of 4 per cent for the past two months. The Fed's move is seen as an aggressive start to a policy shift aimed at bolstering the US labour market amid the Presidential election to be held on November 5.

Experts said the RBI is in no hurry to cut interest rates and may focus on aligning inflation to the medium term target level of 4 per cent. The central bank targets CPI-based inflation and is currently mandated to keep inflation at 4 per cent with a tolerance band of 2 percentage points on either side.

The RBI has been keeping the repo rate unchanged for the past nine consecutive MPC meetings. The immediate focus is on bringing down inflation to the target or below it. Currently, RBI’s repo rate is at 6.5 per cent.

Earlier, the MPC had steadily raised the repo rate by 250 bps, starting from May 2022. One basis point is one-hundredth of a percentage point.

Inflation projections

Most economist and bankers said that the RBI may not change the inflation projection in the upcoming policy, but remained cautious on the upside risk due to growing food inflation.

“FY24 growth and inflation projections are likely to be maintained,” said Aditi Gupta, Economist at Bank of Baroda.

India’s inflation rose slightly to 3.65 per cent in August, as compared to 3.6 per cent in the previous month. A favourable base from last year helped contain consumer inflation, despite an uptick in prices in food categories.

In August MPC meeting, CPI inflation for 2024-25 was projected at 4.5 per cent with the second quarter (Q2) at 4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent. CPI inflation for Q1:2025-26 was projected at 4.4 per cent.

GDP growth

Experts expected that the central bank to maintain gross domestic product (GDP) growth numbers in the upcoming MPC meeting. “The GDP growth is expected at around 7.5 per cent for the rest of FY25 from Q2 onwards due to broad-based growth outlook,” said Madhavankutty G., Group Chief Economist, Manappuram Finance.

In the last MPC meeting, the real GDP growth for 2024-25 was projected at 7.2 per cent with Q1 at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent. Real GDP growth for Q1:2025-26 is projected at 7.2 per cent.

India’s economic growth slowed to a five-quarter low of 6.7 per cent in Q1 of this fiscal year (2024-25) from 7.8 per cent in the preceding March quarter, as government consumption contracted owing to election-related activity, according to data released on August 30.

"A marginal slowdown in GDP was anticipated due to parliamentary election," said V Anantha Nageswaran, chief economic advisor.

The growth was subdued, as compared to the 8.2 per cent jump reported in Q1FY24, but in line with the consensus estimate of Moneycontrol survey of 13 economists conducted last week. The survey predicted 6.8 per cent growth amid forecasts ranging between 6 and 7.5 per cent.