RBI’s Neutral Stance Reflects Evolving Risks

The Reserve Bank of India's neutral stance following its October monetary policy is aligned with the 'wait and watch' strategy, which is the most prudent approach given the unfolding uncertainties on the ground. This strategy sends a subtle message to both the financial system and the public

Talking to Bizz Buzz, MV Hariharan, Former Treasury Head, SBI, said: “The stand indicates that the dovish ‘interpretation’ by all stakeholders notwithstanding, the Central Bank is quite intensely focused on many triggers and the next meet is still a tossup for any easing. The festival season cheer has been maintained, but the looming clouds of the Middle East conflagration spreading unchecked is still a very huge known unknown.”

As things stand, the fragile financial situation all over is tottering with multiple scenarios in play on the ‘what next’ evolving daily. So, Indian currency too will remain under pressure with RBI trying to make the slide downwards as orderly as possible. Gold prices are shining with its glitter bound to give more shock and awe. Over-all, it’s time to dig in and keep an eye on any and every disruptive news for the next step.

As expected, MPC decided by a majority of 5 out of 6 members to keep the policy repo rate unchanged at 6.50 per cent. Consequently, the standing deposit facility rate remains unchanged at 6.25 per cent and marginal standing facility rate and bank rate at 6.75 per cent.

Amongst mixed expectations about the change in stance from withdrawal of accommodation to neutral, MPC unanimously decided to change the stance to ‘neutral’ and to remain unambiguously focussed on durable alignment of inflation with the target of 4 per cent, while supporting growth.

The headline inflation has shown declining trend in the month of July and August and it is below the target of 4 per cent. However it is to be noted that these two months low inflation is due to base effect particularly playing a major role in July.

There were some corrections in food inflation in these two months. RBI expects that headline inflation is likely to see a big jump in September due to unfavorable base effects. RBI expects that headline inflation may moderate in Q4 this year due to good Kharif harvest, ample buffer stock of cereals, and likely a good crop in the ensuing Rabi season. According to RBI, risks to this moderating inflation is the evolving negative geo political situation, recent firming of oil prices which may also affect the firming of other commodities prices, any weather related and climate change risks.

RBI Governor states that the developments since the August meeting of the MPC indicates further progress towards realising a durable disinflation towards the target. RBI currently has a greater confidence in navigating the last mile of disinflation, due to significant risks and RBI governor repeat significant risks, already started above, may affect the disinflation process. RBI Governor further stated that the inflation horse even though brought under control, needs to be more careful about opening the gate as the horse may simply bolt again.

It is in this background future events and data both from domestic and global factors are to be watched to decide is there a room for cutting the repo rate in December or is to likely to be postponed to the first quarter of the 2025.

M Narendra, former CMD, IOB, said, “Looking at global factors and certain threats to domestic favourable factors likely from weather and climate risks if any, RBI may postpone the rate cut to last quarter of the financial year, even though, if RBI finds that favourable situation in disinflation process has been attained on a durable basis, there may be a chance for rate cut in December quarter itself.”

RBI growth projections are intact and the current repo rate per say has not much affected the growth in India and hence from the growth angle RBI gets full space to control headline inflation on a durable basis further.