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    RBI holds interest rate but shifts policy stance to ‘neutral’ signalling future rate cuts

    • October 9, 2024
    • admin

    The Reserve Bank of India (RBI) held its key interest rate at 6.50% on Wednesday, while signaling potential for future rate cuts by shifting its policy stance to “neutral” from the previous “withdrawal of accommodation.”

    The RBI’s Monetary Policy Committee (MPC), comprising three RBI officials and three external members, voted unanimously to maintain the repo rate at 6.50% for the tenth consecutive policy meeting.

    The decision was in line with what experts had predicted.

    However, the committee’s decision to change the policy stance to “neutral” is seen as a move to provide flexibility for future rate cuts as economic growth shows signs of deceleration.

    Governor Shaktikanta Das emphasized that while the RBI remains focused on controlling inflation, the central bank will also work to support economic growth.

    “The inflation horse has been brought back to the stable within the tolerance band. We have to be careful about opening the gate,” Das remarked, signaling a cautious approach to future monetary easing.

    Inflation and economic growth balance

    The decision to maintain rates comes at a time when inflation has been relatively controlled, with annual retail inflation remaining below the RBI’s 4% target for a second consecutive month.

    In August, inflation stood at 3.65%, slightly higher than the revised 3.60% in July but still below economists’ expectations of 3.5%.

    The central bank has projected inflation to average 4.5% for the financial year 2024-25, unchanged from its August forecast.

    However, concerns over slowing economic growth have prompted the change in policy stance.

    Recent data shows that high-frequency indicators, such as the manufacturing and services PMIs, have weakened, with manufacturing hitting an eight-month low and services dropping to a 10-month low in September.

    India’s overall GDP growth slowed to 6.7% in the June quarter, though the RBI maintains its growth projection for the current financial year at 7.2%.

    Market reaction and bond yields drop

    Equity index Nifty 50 was up 0.67% at 25,177.5 points, while the S&P BSE Sensex added 0.55% to 82,080.

    The benchmarks were up 0.2% each ahead of the policy decision.

    The Indian rupee was flat at 83.9450 against the dollar.

    Shares of rate-sensitive sectors such as banking, finance, auto and real estate rose as much as 6%.

    India’s benchmark 10-year bond yield fell by 5 basis points to 6.7392%.

    The policy stance shift is seen as a signal that rate cuts could be on the horizon if inflation remains within target and economic growth slows further.

    Arun Chitnis, chairman of the Anarok Group, welcomed the RBI’s decision to maintain rates, noting that it helps sustain momentum in India’s housing market during the festive season.

    “While a repo rate cut would have been preferable, it is clear that the RBI is on a tightrope walk and must keep various macro-economic factors in mind,” Chitnis said, adding that the fundamentals of the Indian economy remain strong despite global headwinds.

    The post RBI holds interest rate but shifts policy stance to ‘neutral’ signalling future rate cuts appeared first on Invezz


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