RBI’s Shift in Monetary Policy Stance

After nearly 29 months of a tight monetary policy marked by a significant increase in interest rates, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has made a notable change. Following its October meeting, the MPC shifted its policy stance from “withdrawal of accommodation” to “neutral.” This adjustment signals a potential easing of interest rates, with analysts predicting a possible rate cut in December.

Key Highlights

• Current Policy Rate: The policy rate stands at 6.5%, following a cumulative increase of 250 basis points from May 2022 to February 2023.
• Change in Stance: The MPC’s shift to a neutral stance is the first since June 2022 and indicates that inflation concerns are being addressed.
• Inflation Control: India’s benchmark inflation rate has recently stabilized within the RBI’s target range of 2%-6% after exceeding it for five consecutive quarters from March 2022 to March 2023.
• Future Projections: GDP growth is projected at 7.2% for 2024-25, while inflation is expected to average 4.5%.
• Expert Consensus: Economists widely expect a 25 basis point rate cut in the December meeting, followed by another cut in February 2025.

Reasons behind the decision

• Improved Inflation Outlook: The MPC’s decision reflects a belief that inflation is under control, with quarterly inflation rates remaining within the target band for four out of the five quarters since March 2023. This change in inflation dynamics has allowed the MPC to reconsider its aggressive monetary tightening stance.
• Global and Domestic Considerations: The MPC is also mindful of global uncertainties, including geopolitical tensions and economic conditions. A softer policy stance could provide the necessary support to bolster domestic growth amid these challenges.
• Economic Indicators: Recent trends in key economic indicators, such as manufacturing, bank credit, and GST revenue growth, suggest a shift in economic activity that justifies a more accommodative monetary policy.
• Strategic Sequencing: The MPC’s approach of first changing the stance before considering a rate cut allows for flexibility in monitoring inflationary pressures and assessing economic conditions without committing to immediate cuts that could spur inflation.

What do stances of the RBI mean?