RBI MPC Analysis: Don’t read too much between the change in stance

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While addressing the media later in the day, RBI Governor Shaktikanta Das made it explicitly clear that the change in stance in favour of neutral was more to ensure that the MPC has flexibility and optionality to act and make decisions. “There is no room for complacency,” the governor emphasised.

This commentary from the central bank chief puts a cloud on the feasibility of cutting the rate any time soon, and the reason for that remains the same as it has been for several policies - inflation.

“It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago. We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses,” Das said in his policy speech.

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Interestingly, while the reference to an animal has changed from an elephant to a horse, the broad point is that the war against inflation is far from over. In Das’s words, elephants and horses are war animals and both have historically been used in battles.

Relatively, horses are a lot more agile and quick to move. Should we expect something along similar lines to the repo rate? Seems difficult.

The projected inflation for the September quarter is 4.1 percent, as against the estimates of 4.4 percent which was rolled out in the earlier policy. By the April quarter of FY26, this number is expected to flatten out at 4.3 percent, a shade below the earlier estimate of 4.4 percent. In other words, while some sort of cooling of inflation seems to be around the corner, there is no convincing evidence to show that it could be within the tolerance band of 2 - 4 percent. Likewise, there aren’t many cues from the regulator to indicate that the monetary policy committee may be willing to make an exception to its approach on repo rate tinkering if inflation stubbornly remains above the 4 percent mark for a long period.

Therefore, if both these aspects must be seen in conjunction, it may be a bit foolhardy to expect a softening of repo rates in the near future. The question also arises as to whether banks are well-equipped to handle a rate cut just yet when there is not much clarity on whether deposit rates have peaked. To sum up, while we saw a softening of stance, making it more amenable to absorb a rate cut as and when required, the actual act of a cut isn’t visible yet. With India not very dependent on holding a certain dollar interest rate parity, the Indian Rupee being managed quite efficiently around the Rs 84 mark and forex reserves at a healthy USD 700 billion level, the only potential downside risk is an unprecedented rise in crude oil prices. For now, the regulator doesn’t seem to be much bothered about this variable.

Therefore, even from a macro standpoint, the urgency for a rate cut isn’t as compelling as it is for some of the Wester nations.

But who knows, as where things stand, the December MPC also the 52nd meeting, may be Governor Das’s last should he not be given another tenure at office.

Would he hand out goodies to the economy as he bids farewell, is something we should wait and watch.