The Reserve Bank of India’s (RBI) monetary policy committee on October 9 voted 5:1 to keep the repo rate unchanged at 6.5 percent. One of the external members, Nagesh Kumar, voted to reduce the policy rate by 25 bps.
The monetary policy committee (MPC), however, unanimously decided to change the stance to “neutral” from “withdrawal of accommodation”, with an unambiguous focus on durable alignment of headline inflation at 4 percent along with supporting growth. Standing deposit facility (SDF) remained unchanged at 6.25 percent and marginal standing facility (MSF) and the bank rate remained at 6.75 percent.
The RBI retained the real GDP forecast for FY25 at 7.2 percent but revised upward to 7.3 percent from 7.2 percent for Q1FY26.
Private consumption expenditure marked a growth at 7.4 percent in Q1FY25 and consumption spending has been resilient, supported by rural demand and is further expected to improve backed by good monsoon.
The manufacturing purchasing managers’ index (PMI) has been in expansion mode though moderated in H1FY2025.
The services PMI, too, remained in the expansionary zone at 59.6 in Q2FY2025 reinforced by strong demand and new business activity. The government’s consumption expenditure lowered by 0.2 percent YoY in Q1FY2025 and capital expenditure contracted by 19.5 percent during the same time.
The RBI has kept the expected headline inflation for FY25 unchanged at 4.5 percent. The September inflation, however, is expected to see a rise due to the weakening of the base effect.
The sowing of kharif crops this season has been higher than the long-term average and with the above-average monsoon rainfall, the harvesting season will be monitored.
The recent changes in commodity prices, notably metals and crude oil, have seen an uptick due to the widening of war in the Middle East.
The MPC, however, revised headline inflation downward from 4.4 percent to 4.3 percent for Q1FY26. Considering the above factors, the RBI expects the risk to be balanced evenly.
The RBI refrained from giving details about the liquidity management in the policy. FTSE Russell’s recent announcement to include government bonds in its Emerging Markets Government Bond Index (EMGBI) from September 2025 will likely attract a further inflow of foreign funds in the government bond market.
Given the global optimism, India’s forex reserve reached over $700 billion in September, fourth largest in the world. The RBI will remain nimble and flexible in its liquidity management. The second half of September saw a shortfall in liquidity hence, the RBI injected Rs 2.1 lakh crore to smoothen conditions.
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Amid the volatility in the global markets, the domestic market has remained stable. The INR has been the least volatile currency in the emerging markets economies during H1FY2025. The long-term government bond yields have rallied and are currently trading at 6.75 percent with the real policy rate at ~200 bps.
Considering all the factors, we observe that the RBI has remained judicious with its policy rate and stance.
The RBI governor sounded confident about forward inflation reaching the target and stated that the horse (headline inflation) has been stable and in control leading to a change in stance. Moreover, most of the global economies are in the process of lowering their benchmark rate and we expect the RBI to cut the policy rate for the first time since February 2023 in December 2024 with a cumulative cut of 50 bps over the medium term.
Until the next policy (December), the RBI will have more data about the supply of food and Q2FY2025 GDP data to suggest the need to change the policy rate.
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