MPC holds repo rate; changes policy stance to ‘neutral’

The Reserve Bank of India’s monetary policy committee on Wednesday kept the repo rate unchanged at 6.5% while unanimously changing the policy stance from ‘withdrawal of accommodation’ to ‘neutral’.

The change in stance provides flexibility to the MPC while enabling it to monitor the progress on disinflation which is still incomplete.

“Risks stem from uncertainties relating to heightened global geo-political risks, financial market volatility, adverse weather events and the recent uptick in global food and metal prices. Hence, the MPC has to remain vigilant of the evolving inflation outlook,” the MPC statement reads.

RBI governor Shaktikanta Das says the prevailing and expected inflation-growth balance have created congenial conditions for a change in monetary policy stance to neutral even as there is greater confidence in navigating the last mile of disinflation, significant risks to inflation from adverse weather events, accentuating geopolitical conflicts and the very recent increase in certain commodity prices.

“It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago. We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under tight leash, so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses,” Das explains.

The RBI governor says that the CPI (consumer price index) inflation print for the month of September is expected to see a big jump due to unfavourable base effects and pick up in food price momentum, caused by the lingering effects of a shortfall in the production of onion, potato and gram in 2023-24, among other factors. The headline inflation trajectory, however, is projected to sequentially moderate in Q4 of this year due to good kharif harvest, ample buffer stocks of cereals and a likely good crop in the ensuing rabi season. CPI inflation for 2024-25 is projected at 4.5% with Q2 at 4.1%, Q3 at 4.8% and Q4 at 4.2%. Unexpected weather events and worsening of geopolitical conflicts constitute major upside risks to inflation, says Das.

The MPC projects real GDP growth for 2024-25 at 7.2% with Q2 at 7%, Q3 at 7.4% and Q4 at 7.4%. Real GDP growth for Q1 FY26 is projected at 7.3%.

“Looking ahead, the agriculture sector is expected to perform well on the back of above normal rainfall and robust reservoir levels, while manufacturing and services activities remain steady. On the demand side, healthy kharif sowing, coupled with sustained momentum in consumer spending in the festival season, augur well for private consumption. Consumer and business confidence have improved,” the MPC says.