RBI policy: Why MPC may keep repo rate steady but could cut in December?

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Last Updated08/10/2024

The Reserve Bank of India’s (RBI) newly reconstituted Monetary Policy Committee (MPC), which is scheduled to meet from October 7-9, is likely to keep the key policy rate – repo rate – unchanged at 6.5 percent.

The Reserve Bank of India's (RBI) newly reconstituted Monetary Policy Committee (MPC) is set to convene from October 7-9, 2024, and its decision regarding the repo rate is highly anticipated.
Analysts predict that the RBI will keep the key repo rate unchanged at 6.5%, marking the tenth consecutive time the rate remains steady. However, speculation is rife about a possible repo rate cut in the December policy.

The current repo rate stands at 6.5%, where it has been since early 2023, after a 250 bps hike from May 2022 to February 2023.
Majority of analysts believe the RBI will maintain the repo rate in this meeting, supported by robust growth conditions and ongoing concerns over food inflation.

Food inflation remains a key concern, particularly with rising vegetable prices, which are expected to push the September CPI inflation to around 5.2%, up from 3.7% in August.
The near-term inflation trajectory for Q3 FY25 is estimated to hover near 5%, influenced by less favorable base effects and potential price increases in essential goods.

While most economists expect the RBI to maintain the repo rate, a few, such as Nomura’s Sonal Varma, forecast a 25 bps repo rate cut, citing softening growth and aligning inflation with the 4% target. Varma assigns a 55% probability to a rate cut in this policy meeting, compared to a 45% chance of no change.

The MPC’s current stance of "withdrawal of accommodation" may shift to a neutral stance, reflecting a more balanced approach to future monetary policies.
HSBC’s Pranjul Bhandari predicts a change to a neutral stance, citing growth risks and relatively stable inflation.
Other economists, including Bank of America’s Rahul Bajoria, also see a possible shift, driven by the convergence of inflation towards the 4% target and increased data-dependence going forward.
However, some experts, such as Aditi Gupta from Bank of Baroda, expect the RBI to maintain its current hawkish stance until further clarity on inflation and growth emerges.

The RBI’s August 2024 projections for CPI inflation stood at 4.5%, with real GDP growth at 7.2% for FY25.
Economists expect slight downward revisions in the upcoming projections, with Nomura predicting a 0.1% reduction in FY25 CPI inflation to 4.4% and a 0.2% decrease in GDP growth to 7%.

If the repo rate remains steady at 6.5%, borrowers tied to external benchmark lending rates (EBLR) can expect stability in their EMIs.
However, banks may still raise rates on loans linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of past repo rate hikes has not yet been realized.

Several economists predict that the RBI will cut the repo rate by 25 bps in December 2024 and possibly again in February 2025, bringing the repo rate down to 6%.
Analysts from HSBC and Bank of America anticipate further cuts totaling 100 bps by the end of 2025, driven by slowing growth and easing inflation.

The government has appointed three new external members to the MPC:
Ram Singh, Director at the Delhi School of Economics.
Saugata Bhattacharya, Economist.
Nagesh Kumar, Director and Chief Executive of the Institute for Studies in Industrial Development.