RBI holds rate at 6.5%, shifts stance to ‘neutral’

Highlights:

• The Reserve Bank of India (RBI) on Wednesday kept its benchmark interest rate unchanged at 6.50% for the tenth consecutive monetary policy review since April 2023. However, the central bank signaled a potential rate cut in the near future by shifting its policy stance from "withdrawal of accommodation" to a more flexible neutral stance.

Monetary Policy Committee (MPC) Decisions

Unchanged Interest Rates:

• The decision to keep rates steady was supported by five out of six members of the Monetary Policy Committee (MPC). The shift in policy stance to neutral was agreed upon unanimously. This change signals the RBI's intent to align inflation with its target while supporting economic growth.

Focus on Inflation Control:

• RBI Governor Shaktikanta Das emphasized that inflation is a key concern despite recent moderation. He used the analogy of keeping the "inflation horse" under tight control, highlighting the effort required to keep inflation within the target range. He warned that the RBI must be cautious about loosening controls, as inflation could spike again.

Macroeconomic Parameters: Inflation and Growth

Inflation Outlook:

• While inflation was below the RBI's 4% target in July and August, the central bank expects inflation to remain elevated in the near term. The RBI revised its second-quarter inflation projection down to 4.1% but expects it to rise to 4.8% in the October-December quarter. Factors like adverse base effects and volatile international crude oil prices are contributing to this outlook.

GDP Growth Projections:

• The RBI maintained its GDP growth projection at 7.2% for 2024-25, with inflation risks seen as balanced. Governor Das noted that domestic growth remains strong, driven by private consumption and investment, giving the central bank space to focus on ensuring inflation returns to the 4% target in a sustainable manner.

Geopolitical and External Risks

Geopolitical Risks and Volatile Oil Prices:

• The RBI expressed concerns over geopolitical tensions, particularly in West Asia, which could affect inflation through volatility in global crude oil prices. Deputy Governor Michael D. Patra noted that the RBI has been building buffers to mitigate spillovers from global risks, making the bank more confident in managing the evolving situation.

Prelims Takeaways:

• Monetary Policy