The Reserve Bank of India (RBI) Monetary Policy Committee (MPC), which is scheduled to meet from December 4 to 6, is likely to keep the repo rate – the key policy rate – unchanged at 6.5 per cent in the meeting. This would be the 11th consecutive monetary policy, or for 22 months, that the repo rate would have been left unchanged. The six-member MPC may also retain the monetary policy stance as ‘neutral’ in the upcoming policy, economists said. The MPC’s decision is expected to be announced on December 6. What is RBI likely to announce in the December policy? The rate-setting panel will meet against a backdrop of growing concerns over slowing economic growth and elevated inflationary pressures. These two factors will likely weigh on the MPC’s decision in its December 6 policy announcement. “Given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 per cent in the last two months, a status quo on the repo rate will be the logical outcome from the policy,” said Madan Sabnavis, Chief Economist, Bank of Baroda. The recent data released by the National Statistics Office (NSO) showed that the country’s real gross domestic product (GDP) slumped to a seven-quarter low of 5.4 per cent in July-September 2024. This compares with a growth of 6.7 per cent in the April-June 2024 quarter and 8.1 per cent in the July-September 2023 period. Consumer price-based inflation (CPI), or retail inflation, surged to a 14-month high of 6.21 per cent in October 2024, compared to 5.5 per cent in September. “RBI is expected to remain on pause in December 2024, with upside risk to food inflation in the near-term. Overall headline CPI inflation in Q3FY25 is averaging closer to 6 per cent versus RBI’s estimate of 4.8 per cent. Subdued core inflation shows that inflation pressures remain localised due to presence of negative output gap,” said Gaura Sengupta, Chief Economist, IDFC FIRST Bank. Goldman Sachs also expects the RBI to keep the policy repo rate unchanged at 6.5 per cent at the December 6 policy meeting as a base case. Can there be a change in monetary policy stance? The Reserve Bank’s MPC changed the policy stance from “withdrawal of accommodation” to “neutral” in the October 2024 policy. The RBI may not tweak the stance in the forthcoming policy, analysts said. “We further expect the RBI to retain the ‘neutral’ policy stance and remain “unambiguously focused on durably aligning inflation to the target, while supporting growth”,” Goldman Sachs said in the report. In the last policy meeting, the MPC changed the monetary policy stance to 'neutral', after keeping it as 'withdrawal of accommodation' for 28 straight months. The neutral stance indicates that conditions are now congenial for a cut in the repo rate in the near future. Growing clamour for repo rate cut Recently, two Union ministers have called for a cut in the repo rate. Last month, Finance Minister Nirmala Sitharaman batted for “affordable bank interest rates” to support industries to ramp up and build capacities. “…at a time when we want industries to ramp up and build capacities, bank interest rates will have to be far more affordable,” Sitharaman had said at an event while responding to a question on whether she expects a reduction in interest rates soon or if there could be a delay in the cut given current inflation print. Union Minister for Commerce and Industry, Piyush Goyal, had also urged the RBI to cut interest rates to boost economic growth and look through food prices while deciding on monetary policy. Will RBI revise inflation and GDP projections? There could be a change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth is expected to be lower in Q2, said Bank of Baroda’s Sabnavis. “It would hence be of interest to see what the projections this time are,” he said. The RBI has projected real GDP growth for 2024-25 at 7.2 per cent with Q2 at 7 per cent; Q3 at 7.4 per cent; and Q4 at 7.4 per cent. The forecast for CPI is 4.5 per cent for 2024-25, with Q2 at 4.1 per cent; Q3 at 4.8 per cent; and Q4 at 4.2 per cent According to IDFC FIRST Bank’s Sengupta, there could be a downside risk to RBI’s FY25 GDP growth estimate of 7.2 per cent and upside risk to FY25 CPI inflation estimate of 4.5 per cent. So, what happens to lending rates if the 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 median 1-year marginal cost of funds-based lending rate (MCLR) of SCBs has increased by 170 bps during May 2022 to October 2024.
