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India’s central bank set the stage for its first interest rate cut in four years, growing more confident that inflation will ease in coming months. Bonds and stocks advanced.
The new monetary policy committee voted five-to-one to keep the benchmark repurchase rate at 6.5% on Wednesday — in line with forecasts — but opted to change the policy stance to ‘neutral,’ signaling the next likely move may be a cut. One of the new external members, Nagesh Kumar, voted for a reduction at the meeting.
Governor Shaktikanta Das said food costs, which make up about half of the consumer price basket, will likely ease in coming months, improving the outlook for inflation. Even so, he said the central bank doesn’t want to give up its hard-fought gains to bring inflation under control and policymakers need to remain on guard.
“It is with a lot of effort that the inflation horse has been brought to the stable,” he said in a televised speech from Mumbai. “We have to be very careful about opening the gate as the horse may simply bolt again.”
Bonds advanced the most since February, with the yield on the 10-year security falling by five basis points to 6.75%. The rupee traded little changed, while stocks extended gains.
While RBI remains confident of aligning inflation with its 4% target, “there is no room for complacency,” Das said, in the post policy briefing. The central bank’s “focus will be on the near term hump,” his deputy Michael Patra told reporters, adding that adverse weather events and worsening of geopolitical conflicts remain a key risk to prices.
“Considering the significant risks that lie ahead of us, it will not be appropriate to specifically talk of timing of rate cut,” Das said.
Economists say the central bank will watch the impact of geopolitical uncertainties and inflation readings in the coming months before it lowers borrowing costs.
“The bar for rate cut is still high, and contingent on food inflation subsiding,” said Dhiraj Nim, an economist at Australia & New Zealand Banking Corp. “Our expectation is that the RBI will cut the rates in December, absent any shock in food prices.”
Inflation is easing in countries from the US to the UK, allowing central banks the world over to recalibrate their monetary policy and begin cutting interest rates. The US Federal Reserve began lowering rates last month and is likely to cut them again in November by a quarter-point.
The Reserve Bank of India retained its growth and inflation projections for the fiscal year through March 2025 at 7.2% and 4.5%, respectively. The economic growth outlook remains intact, Das said, with private consumption and investment growing in tandem.
Recent figures showed a moderation in growth in the world’s fastest-expanding nation, and signs of a slide in urban spending.
What Bloomberg Economics Says
The Reserve Bank of India’s decision to pivot to a neutral stance, but hold off on easing, signals it’s aware of rising threats to growth and taking a cautious approach to inflation. Even as it’s become clear that a bumper crop this year should pull down food inflation ahead, the RBI likely prefers to see through the near-term expected surge in prices before it starts cutting rates. That suggests the central bank is on track to begin easing in December.
— Abhishek Gupta, India economist
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Das said the RBI will continue to be nimble and flexible in liquidity management. He also warned India’s shadow lenders to avoid a rapid build up of credit. The central bank won’t hesitate in taking action on errant entities if needed, he said.
“The surprise decision to change the stance to neutral underlines growing confidence in achieving the inflation targets,” said Anubhuti Sahay, an economist at Standard Chartered Plc. “It’s likely to raise expectations of rate cut in December though the headline CPI prints will remain the key determinant of the first rate cut timing.”
--With assistance from Shwetha Sunil.
(Updates with more comments from post policy conference in the sixth paragraph.)
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