RBI policy: Why Monetary Policy Committee may keep repo rate steady but could cut in December?

Will RBI change repo rate in the upcoming policy?

While a large number of economists expect the RBI’s rate-setting panel, which will announce its decision on October 9, to leave the repo rate unchanged, a few see a reduction of 25 basis points (bps). One basis point is one-hundredth of a percentage point.

“RBI is expected to maintain status quo on policy rates in October policy. Policy space to remain on pause is provided by growth conditions which have held-up,” said Gaura Sen Gupta, Chief Economist, IDFC FIRST Bank.

The risk on food inflation is not yet abated with daily retail prices indicating a rise in vegetable prices. September CPI (consumer price index) inflation print is estimated at 5.2 per cent versus 3.7 per cent in August. Majority of the rise is due to less supportive base-effects. On a month-on-month basis, the estimate builds-in a rise in food prices. The near-term headline CPI inflation trajectory is tracking at near 5 per cent in Q3 FY25, she said.

Bank of America’s Economist (India and ASEAN) Rahul Bajoria said the guidance from the RBI for near term growth and inflation dynamics remains upbeat, and that rules out any material risk of a change in monetary policy guidance in the upcoming October MPC meeting.

However, Nomura’s Economist Sonal Varma expects a 25 bps repo rate cut versus consensus expectations of a pause.

“We attach a 55 per cent probability to a rate cut versus 45 per cent to a hold, acknowledging that this is a close call. We believe inflation is aligned to the 4 per cent 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,” Varma said in a report.

Will there be a change in monetary policy stance?

Economists are split over the monetary policy stance, with a majority seeing the policy stance changing to ‘neutral’, and a few expecting continuation of ‘withdrawal of accommodation’.

“We think it will change its stance from a hawkish ‘withdrawal of accommodation’ to ‘neutral’ in the upcoming 9 October policy meeting,” HSBC’s Chief Economist (India and Indonesia), Pranjul Bhandari said.

Bank of America’s Bajoria said the incoming near-term data is much more mixed, and growth risks appear tilted to the downside.

“It is possible, that the RBI may also signal greater data dependence going ahead, as real rates remain elevated, and headline inflation is closest to the inflation target it has been in almost twenty-two quarters (on a 4-quarter rolling basis). This opens up the possibility of a shift in stance to neutral as well, if the RBI wants to entertain the idea of a rate cut,” he said.

Bank of Baroda’s Economist Aditi Gupta and IDFC’s Sen Gupta, however, see the monetary policy stance of withdrawal of accommodation to be retained.

Will RBI revise inflation and GDP projections?

In August’s monetary policy, the RBI projected CPI at 4.5 per cent and real gross domestic product (GDP) at 7.2 per cent for FY2025.

Nomura’s Economist Sonal Varma expects minor downward revisions to the RBI’s FY25 projections for CPI inflation and GDP growth.

“We expect the RBI to lower its Q2 FY25 (July-September) and Q3 FY25 (October- December) CPI inflation forecasts by 0.2 pp (percentage points) and 0.3 pp, respectively, with FY25 CPI inflation likely to be lowered by 0.1pp to 4.4 per cent,” she said.

Varma expects the RBI to lower its FY25 (year ending March 2025) GDP growth forecast by 0.2pp to 7 per cent, while maintaining its FY26 forecast at 7 per cent.

So, what happens to lending rates if repo rate is left steady?

If the RBI leaves the repo rate steady at 6.5 per cent, all external benchmark lending rates (EBLR) linked to the repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not increase.

However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250 bps hike in the repo rate between May 2022 and February 2023 has not happened.

In response to the 250 bps hike in the policy repo rate since May 2022, banks have revised upwards their repo-linked external benchmark-based lending rates (EBLRs) by a similar magnitude. The one-year median MCLR of banks has increased by 170 bps during May 2022 to August 2024.

When is RBI expected to cut repo rate?

Economists expect the RBI to deliver the first repo rate cut in December 2024.

HSBC’s Bhandari sees repo rate cuts of 25 bps each in the December and February meetings, taking the repo rate to 6 per cent.

“Slowing growth and falling inflation offer room for the RBI to cut rates in coming months. We expect repo rate cuts of 100 bps by December 2025, beginning December 2024,” said Bank of America’s Bajoria.

Who are the new MPC’s external members?

Last week, the government appointed three external members in the MPC — Ram Singh, Director, Delhi School of Economics, University of Delhi; Saugata Bhattacharya, Economist and Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development.

They have replaced the previous external MPC members – Ashima Goyal, professor at the Indira Gandhi Institute of Development Research, Jayanth R Varma, professor IIM-Ahmedabad, and Shashanka Bhide, senior advisor at the National Council of Applied Economic Research – whose tenures ended on October 4.