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The Reserve Bank of India’s newly reconstituted Monetary Policy Committee (MPC) left the repo rate, the key policy rate, steady at 6.5 per cent Wednesday for the 10th consecutive time as inflation continued to remain a sore point. The last change in the repo rate was in February 2023 when the RBI hiked it by 25 basis points to 6.5 per cent.
The RBI retained the projections for gross domestic product (GDP) and consumer price-based inflation (CPI) for FY2025 at 7.2 per cent and 4.5 per cent, respectively.
The six-member MPC, however, changed the monetary policy stance to ‘neutral’, after keeping it as ‘withdrawal of accommodation’ for 28 straight months. The change in monetary policy stance to neutral indicates that conditions are now congenial for a reduction in the repo rate — the rate at which the RBI lends money to banks — in the near future.
Announcing the policy, RBI Governor Shaktikanta Das said, “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 a 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.”
In previous policies, Das had compared inflation with an elephant which had gone for a walk and appeared to return to forest, and the RBI would like it to “return to the forest and remain there on a durable basis”.
Under the flexible inflation targeting (FIT) framework, the RBI has been mandated to bring inflation to 4 per cent with +/-2 per cent band. The RBI has been focussing on keeping inflation to 4 per cent on a durable basis.
Das said the moderation in headline inflation seen in the last few months is expected to reverse in September and October and may accelerate to around 5 per cent due to the base effect and an uptick in certain components of food inflation. Retail inflation, or CPI, edged up to 3.7 per cent in August from 3.6 per cent in July.
The decision to keep the repo rate steady was taken with 5:1 majority, with the newly inducted external MPC member Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, voting to reduce the repo rate by 25 basis points (bps). One basis point is one-hundredth of a percentage point.
The RBI retained the CPI forecast for FY2025 at 4.5 per cent. However, for Q2 FY25, the RBI expects inflation to ease to 4.1 per cent from the 4.4 per cent projection made in the August policy. In Q3 and Q4, the inflation is expected to be at 4.8 per cent and 4.2 per cent, respectively, compared to earlier estimates of 4.7 per cent and 4.3 per cent. For Q1 FY26, the RBI has revised downward the inflation projection to 4.3 per cent from 4.4 per cent.
The real GDP growth projection for FY2025 has been left unchanged at 7.2 per cent. In the September 2025 quarter, the RBI lowered its GDP projection to 7 per cent (vs 7.2 per cent in August policy), while for Q3 and Q4, it has revised the forecast upwards from 7.3 per cent and 7.2 per cent, respectively to 7.4 per cent each.
Das noted that going ahead India’s growth story remains intact as its fundamental drivers — consumption and investment demand — are gaining momentum. Prospects of private consumption, the mainstay of aggregate demand, look bright on the back of improved agricultural outlook and rural demand.
The MPC also decided to change the monetary policy stance to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.
The RBI’s decision to change the policy stance from the withdrawal of accommodation means it won’t initiate measures to reduce money supply in the system. The regulator was following the withdrawal of accommodation stance to bring down inflation while supporting the growth.
Asked about the reason for changing the monetary policy stance to neutral, Das said, “We have changed the stance at the moment because we see that the balance in growth and inflation is well-poised. So the MPC considered that the timing is appropriate to shift the stance to neutral.”
Neutral stance gives the RBI the optionality and flexibility to take decisions, he said.
“You should assess the stance by itself independently. We will like to see off the near-term hump in inflation carefully, which all our projections suggest is going to happen, before even considering the next move,” said RBI Deputy Governor Michael Patra.
Most economists expect the RBI to cut the repo rate by 25 bps in its December monetary policy.
“We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, given food inflation is expected to ease after a healthy monsoon,” Crisil said in a note.
Commenting on the policy, Madhavi Arora, Emkay Global Financial Services’ Lead – Economist, said the RBI reiterated that policy must continue to be actively disinflationary to ensure fuller transmission, as the last mile of disinflation is still tricky.
“The policy tone was confident on domestic dynamics with no change in FY25 growth and inflation, with skepticism shown by the RBI on noises led by food inflation and relatively slower and uneven pace of disinflation,” Arora said.
