The Reserve Bank of India (RBI) has maintained its Repo rate at 6.5 per cent in a 5:1 majority decision by its Monetary Policy Committee (MPC).
The only dissenting vote came from Nagesh Kumar, who favoured a 25 basis point reduction.
Despite the stable rate, the RBI Governor, Shaktikanta Das, cautioned about inflationary pressures, particularly due to unfavourable base effects and rising food prices in September. He warned that global events, such as geopolitical tensions, pose significant inflation risks.
Key takeaways:
The RBI expects inflation to rise to 5.2 per cent in September, up from 3.7 per cent in August, largely due to base effects and food prices.
While inflation is projected to moderate in Q4 FY25, factors like volatile crude oil prices, weather events and international geopolitical tensions remain concerns.
The RBI shifted its policy stance from "withdrawal of accommodation" to "neutral," providing flexibility to adapt to economic changes.
This shift suggests the RBI is positioning itself to respond dynamically, potentially opening up the option for rate cuts if inflation eases.
Some analysts, such as Suman Chowdhury of Acuité Ratings, believe the RBI is cautious due to ongoing food inflation risks.
Dhiraj Relli from HDFC Securities noted that the shift to a neutral stance might indicate the RBI’s readiness to consider a rate cut later, depending on inflation trends.
The RBI has kept its retail inflation forecast at 4.5 per cent and GDP growth projection at 7.2 per cent for FY25, reflecting optimism but also acknowledging risks like rising food and metal prices. Governor Das noted that good harvests could help moderate inflation.
The RBI on Wednesday retained the CPI inflation projection for 2024-25 at 4.5 per cent, with Q2 at 4.1 per cent; Q3 at 4.8 per cent; and Q4 at 4.2 per cent.
CPI inflation for Q1:2025-26 is projected at 4.3 per cent. The risks are evenly balanced.
"The CPI print for the month of September is expected to see a big jump due to unfavourable base effects and pick-up in food price momentum, caused by the lingering effects of a shortfall in the production of onion, potato and chana dal (gram) in 2023-24, among other factors," Das said.
He further said the headline inflation trajectory, however, is projected to sequentially moderate in the fourth quarter of this year due to good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season.
The steady Repo rate means that EMIs for loans linked to the external benchmark lending rate (EBLR) will remain unchanged. However, banks may raise rates on loans tied to the marginal cost of fund-based lending rate (MCLR), as not all rate hikes have been fully passed on.
Analysts predict that the RBI may consider cutting the Repo rate in December 2024 if inflation, particularly food prices, moderates.
Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation. International crude oil prices have become volatile in October, Das added.
The Governor also said food inflation pressures could see some easing later in this financial year on the back of strong kharif sowing, adequate buffer stocks and good soil moisture conditions which are conducive for rabi sowing.
"It is with a lot of effort that the inflation horse has been brought to the stable, that is, 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," he emphasised.
Going forward, Das said there is a need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses.
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