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The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) meeting commenced on Monday, October 7, 2024, amidst heightened anticipation among economists and market analysts. Speculation has been swirling about the possibility of a rate cut or a shift in the central bank's monetary policy stance, particularly following the US Federal Reserve's unexpected 50-basis-point rate cut in September 2024. While market forecasters have ramped up expectations for a rate cut, experts like Suman Chowdhury, Executive Director & Chief Economist at Acuité Ratings & Research, caution that the current economic environment may not be conducive to such a move.
The lingering threat of inflation, particularly regarding food prices, remains a concern despite headline Consumer Price Index (CPI) inflation settling within 4% for the past two months. Chowdhury also highlighted the escalating conflict in West Asia, particularly between Israel and Iran, which could potentially drive global oil prices upwards and exacerbate inflation uncertainty in India. Compounding these concerns, domestic economic indicators have shown signs of weakness. The Purchasing Managers’ Index (PMI) for September hit a multi-month low, and core sector output contracted for the first time in over 40 months. These factors suggest that the RBI may opt for a 'wait and watch' approach, potentially postponing any rate cuts until at least December 2024 or February 2025.
The RBI's decision will be heavily influenced by the delicate balance between controlling inflation and fostering economic growth. While inflation in August stood at 6.83%, a level that, although stabilizing, remains above the RBI's target, the recent decline to 3.65% in August offers some hope. Anwin Aby George, a research analyst at Geojit Financial Services, argues that the RBI could utilize this favorable development to implement rate cuts in the future. However, others, like Vaibhav Porwal, co-founder of Dezerv, contend that rising crude oil prices, global economic uncertainties, and domestic challenges may force the RBI to maintain its current policy stance.
The uncertainty surrounding global oil prices and geopolitical instability, coupled with the need to maintain a stable borrowing environment for businesses and consumers, suggests that the RBI will likely adopt a balanced approach. Swapnil Aggarwal, Director at VSRK Capital, echoes this sentiment, stating that the central bank is likely to keep the repo rate unchanged at 6.50% during the October 7-9 meeting. Maintaining this rate, Aggarwal argues, would contribute to overall market stability and benefit both fixed-income markets and corporate profit margins in equity markets. The consensus among experts points toward the RBI holding its current rates steady, given the prevailing economic uncertainties.
The RBI's decision will have significant implications for the Indian economy. A rate cut could potentially stimulate growth by making borrowing cheaper for businesses and consumers, while a hold could signify a cautious approach to navigating the current economic climate. The MPC's announcement, expected later this week, will be closely watched by investors, businesses, and policymakers alike.
Source: RBI MPC: Is rate cut on card? Shaktikanta Das to announce soon