RBI MPC meeting highlights: Change in policy stance, what next

The Reserve Bank of India (RBI) keeps the benchmark repo rate (the rate at which RBI lends money to commercial banks in exchange for securities) unchanged at 6.5% for the 10th consecutive time in its 4th bi-monthly Monetary Policy Committee (MPC) meeting for FY25. The central bank committee mentioned that it is prudent to maintain greater flexibility and optionality, given the present circumstances. Other key rates such as Standing Deposit Facility (SDF), Marginal Standing Facility (MSF), and Bank Rate have been kept unchanged at 6.25%, 6.75%, and 6.75%, respectively.

As widely expected, RBI did not follow the path of falling rate regime adopted by the US Federal Reserve and central banks of other developed nations (like Canada) by following the status quo on interest rates. However, the significant diversion in the current MPC was the change in policy stance unanimously from ‘withdrawal of accommodation’ to ‘Neutral’.

A ‘withdrawal of accommodation' refers to policy tightening by the central bank to reduce the money supply in the economy. The stance focuses more on stabilizing prices through policy actions such as interest rate hikes than supporting economic growth through lower rates. On the other hand, a ‘neutral’ stance indicates a balanced approach giving equal priority to controlling inflation and supporting economic growth. It means that the central bank can either raise or reduce benchmark rates based on how the key economic indicators like inflation and GDP are panning out.

The RBI Governor Shaktikanta Das said, “We have greater confidence that inflation is moderating, but acutely aware there are significant risks. We have changed the stance because growth and inflation are well poised, the balance is well poised. The timing is appropriate for a stance change.”

Consumer Inflation Forecasts

RBI’s rate-setting panel retained the inflation forecast based on the consumer price index (CPI) at 4.5% for FY25. However, the quarterly projections have been revised as follows:

GDP Forecasts

RBI’s rate-setting panel retained the real GDP forecast at 7.2% in FY25. However, the quarterly projections have been revised as follows:

UPI Limit

Among other important policy actions, RBI raised the per transaction limit in UPI -1,2,3 pay from INR 5,000 to INR 10,000 and in UPI Lite wallet from INR 2,000 to INR 5,000 to encourage wider adoption of the Unified Payments Interface (UPI). The move is expected to facilitate larger transactions and deepen financial inclusion in India, particularly in rural and semi-urban areas.

Market Reaction

Soon after the policy announcement, the stock market reacted positively as the benchmark stock index BSE Sensex jumped over 550 points to reclaim the 82,000-level mainly driven by the change in policy stance to ‘Neutral’. The bond market also rallied with yields down (56 basis points to 6.880 at the time of writing) and the curve steepening due to expectations of a potential cut.

Conclusion

Despite being on a downward trajectory, RBI noted the moderation in inflation has been slow and uneven. Further, it expects the moderation to reverse in September print, and the headline inflation to remain elevated in the near term. However, the central bank expects food inflation later in the fiscal year to soften due to strong kharif sowing, surplus stock, and good soil moisture conditions, which are favourable for the rabi season.

Hence, the tweak in policy stance to ‘Neutral’ paves the way for potential rate cuts in the future, but it is too early to state whether that would happen anytime soon. The central bank is wary of near-term inflation foreseeing upside risks due to adverse base effects, among other factors. On top of this, there are concerns related to the Middle East crisis that could push up commodity prices.

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