RBI Monetary Policy: Status Quo Likely To Be Maintained For Tenth Straight Time

The Reserve Bank of India's Monetary Policy Committee will meet from October 7 to 9 for policy review. This is the first MPC meeting after the appointment of three new external members -- Ram Singh, Saugata Bhattacharya, and Nagesh Kumar.

Only three of the 13 economists polled by Bloomberg expect the MPC to cut the repo rate by 25 basis points, with the remaining expecting a status quo for the tenth straight meeting. The benchmark lending rate is at 6.5%.

The first cut and change in stance is likely in December 2024 or February 2025, according to Soumya Kanti Ghosh, chief economic advisor at the State Bank of India. "We, however, believe a possibility of growth slowing down incrementally with the leading indicators showing a declining momentum and increasing geopolitical risk might prompt a rewording of communication from RBI highlighting the need to have a balanced growth inflation balance," he added.

However, Nomura stated that it expects the October meeting to mark the start of monetary policy inflection. "We believe inflation is aligned to the 4% target, growth signals are softening, a policy induced credit slowdown is underway and real rates are high, which provides room to recalibrate policy settings without stoking inflation," said Sonal Varma and Aurodeep Nandi, India economists at Nomura.

A range of high frequency indicators hints at slowing momentum in economic activity despite continuing resilience. The HSBC India Composite Output Index fell to a ten-month low in September amidst a slower pace of expansion in both - factory production and services activity. The eight core industries too saw a contraction in August to 1.8%, its first decline in 42 months. Economists at Nomura said that they also expect minor downward revisions to the RBI’s FY25 projections for GDP to 7% from 7.2% and for CPI inflation to 4.4% year-to-year from 4.5%.

Retail inflation rose to 3.65% in August, compared to 3.54% in July. In July, the inflation was the lowest in nearly five-years. Despite the uptick in August, it remains within the central bank's target of 4% aided by the base effect.

Food inflation is likely to remain elevated. Prices of key vegetables, such as onions and tomatoes, climbed in September, according to high frequency data by the Department of Consumer Affairs, as several parts of the country saw crop damages amid excessive rains.

CPI is expected to remain below 5% in the remaining months, except for September because of unfavourable base effect, Ghosh said. "However, for the full year FY25, CPI inflation is likely to average to 4.5%-4.6% and will remain In the RBI’s targeted range of 4-6%."

With 10-year benchmark bond yields falling to 6.75%, further reductions are expected, aided by the global monetary easing cycle and robust foreign flows amidst the price differentials.

Vivek Kumar, economist at QuantEco Research, cautioned that if the RBI continues to delay rate cuts, it will need to address the "impossible trinity"—balancing exchange rates, free capital movement, and independent monetary policy. He explained that prioritising monetary policy independence would require the RBI to intervene more aggressively to stabilise the rupee, though this could conflict with its inflation-targeting objectives.

Donald Trump's likely re-election in the United States, and the steep tariffs he is likely to impose on imports from China, will also mean a steep devaluation in the Yuan, cautioned Jahangir Aziz, head of emerging markets economics research and commodities, JPMorgan. The move will mean some eventual appreciation in the Rupee against Yuan, leaving Indian exporters facing a large disadvantage.

In September, India's merchandise trade deficit expanded to a ten-month high of $29.65 billion, as a rise in imports was accompanied by a fall in exports.