By Swati Bhat and Sudipto Ganguly
In a move widely expected by experts, the Reserve Bank of India (RBI) decided to keep its key interest rate unchanged on Wednesday but changed its policy stance to "neutral". This shift opens the door for potential rate cuts in response to early signs of an economic slowdown.
The Monetary Policy Committee (MPC), composed of both RBI and external members, voted unanimously to keep the repo rate steady at 6.50% for the tenth consecutive policy meeting. However, they adjusted the policy stance from "withdrawal of accommodation" to "neutral".
While five out of six members voted in favor of maintaining rates, the change in stance reflects a focus on aligning inflation with the target while supporting growth.
Market experts had predicted this decision, with 80% of polled economists expecting rates to remain unchanged. The last rate adjustment occurred in February 2023 when the policy rate was increased to 6.50%.
Following the announcement, India's benchmark yield dropped by 5 basis points to 6.7392%. The Nifty 50 index saw a 0.67% increase to 25,177.5 points, while the S&P gained 0.55% to 82,080. Prior to the policy decision, both benchmarks were up 0.2%.
The Indian rupee remained stable at 83.9450 against the dollar.
Annual retail inflation stayed below the central bank's 4% target for the second consecutive month, registering at 3.65% in August. The central bank anticipates inflation to average 4.5% in the financial year 2024-25.
Despite concerns about inflation stemming from tensions in the Middle East, worries about economic growth are also emerging. High-frequency indicators like the manufacturing PMI and services PMI have shown declines, with India's overall growth slowing to 6.7% in the June quarter. The RBI projects GDP growth for the current financial year at 7.2%.
Reserve Bank of India governor Shaktikanta Das explained that the balance between inflation and growth has prompted the shift in the monetary policy stance. While there is confidence in disinflation progress, risks remain from adverse weather conditions, geopolitical conflicts, and rising commodity prices.
Analysis:
The RBI's decision to maintain interest rates and shift to a "neutral" policy stance indicates a cautious approach to economic conditions. The potential for rate cuts in the future could stimulate growth but also reflects concerns about inflation and global uncertainties. For investors, this means monitoring market movements closely and adjusting investment strategies accordingly to navigate potential changes in interest rates and economic trends.