RBI opened the door to first rate cut in 4 yearsTop Stories

October 09, 2024 16:57
RBI opened the door to first rate cut in 4 years

(Image source from: bfsi.economictimes.indiatimes.com)

The Indian central bank has set the stage for its first interest rate cut in four years, as it is more confident that inflation will decrease in the coming months. Bonds and stocks have shown progress. The new monetary policy committee voted 5-to-1 to maintain the benchmark repurchase rate at 6.5%, in line with forecasts, but decided to change the policy stance to 'neutral,' indicating that a rate cut is the next likely move. One of the new external members, Nagesh Kumar, voted for a rate reduction at the meeting. The Governor, Shaktikanta Das, stated that food costs, which make up about half of the consumer price basket, will likely ease in the coming months, improving the outlook for inflation. However, he said the central bank does not want to give up its hard-fought gains in controlling inflation, and policymakers need to remain vigilant. Bonds have advanced the most since February, with the yield on the 10-year security falling by five basis points to 6.75%.

The rupee remained relatively stable, while stock prices continued to rise. Although the Reserve Bank of India (RBI) is confident of aligning inflation with its 4% target, the central bank's deputy governor, Michael Patra, warned that there is no room for complacency, as adverse weather events and worsening geopolitical conflicts pose significant risks to prices. The RBI's focus will be on addressing the immediate challenge, and the central bank's governor, Shaktikanta Das, stated that it would not be appropriate to discuss the timing of a rate cut, given the substantial risks ahead. Economists suggest that the RBI will monitor the impact of geopolitical uncertainties and inflation readings in the coming months before lowering borrowing costs, as the bar for a rate cut remains high and is contingent on a decline in food inflation. However, some economists expect the RBI to cut rates in December, assuming there are no shocks in food prices. Additionally, inflation is easing in countries around the world, allowing central banks to recalibrate their monetary policies and begin reducing interest rates.

The Reserve Bank of India kept its forecasts for economic growth and inflation for the fiscal year ending in March 2025 at 7.2% and 4.5%, respectively. The central bank's Governor stated that the economic outlook remains stable, with private spending and investment increasing together. Recent data indicates a slowdown in growth in the world's rapidly expanding economy, as well as signs of a decline in urban spending. The Reserve Bank of India (RBI) will remain agile and adaptable in managing liquidity. Das cautioned India's non-banking financial companies to avoid a rapid increase in lending. The central bank will not hesitate to take action against any non-compliant entities if necessary. The unexpected decision to shift the stance to neutral highlights the growing belief in achieving the inflation goals, said Anubhuti Sahay, an economist at Standard Chartered Plc. This may raise hopes of an interest rate reduction in December, although the headline consumer price index will be the key factor determining the timing of the first rate cut.

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RBI  Reserve Bank of India  RBI rate cut