RBI Monetary Policy Update: Repo Rate Unchanged, Possible Rate Cut Ahead

RBI Monetary Policy | The latest announcement from the Reserve Bank of India (RBI) came as expected, with the Monetary Policy Committee (MPC) deciding on Wednesday, October 9, to keep the repo rates unchanged. 

More noteworthy, however, is the shift in the policy stance from "withdrawal of accommodation" to "neutral." This significant change signals the central bank's readiness to consider a rate cut if the trend of easing inflation persists.

Here's a detailed breakdown of the October MPC meeting's key outcomes and what they might mean for the future.

Key Decisions from the October MPC Meeting

1. No Change in Repo Rates

Despite the global trend of rate cuts, including a recent 50 basis point reduction by the US Federal Reserve, the RBI chose to maintain the repo rate at 6.5%. 

This decision was supported by five out of six MPC members, with a unanimous vote for changing the policy stance to "neutral." This is the first stance change in two years, hinting at a possible rate adjustment in the future depending on economic indicators.

2. Persistent Inflation Concerns

The RBI did not adjust its overall inflation forecast for FY25, maintaining the CPI Inflation estimate at 4.5%. 

However, there were minor adjustments in quarterly estimates, reflecting ongoing concerns about sticky inflation influenced by fluctuating food and fuel prices. Notably, the RBI expects an uptick in inflation in September due to adverse base effects and rising fuel prices.

3. Optimistic Economic Growth Projections

On the growth front, the RBI maintained a positive outlook for the Indian economy, forecasting a real GDP growth rate of 7.2% for FY25. 

Although there was a slight downward revision for the Q2FY25 forecast, expectations for the latter half of the financial year and the first quarter of FY26 were adjusted upward.

4. UPI Transaction Limits Raised

In a bid to further enhance financial inclusion and promote the adoption of digital payments, the RBI announced increases to transaction limits on the Unified Payments Interface (UPI). 

The per-transaction limit for UPI 123 Pay has been doubled from Rs 5,000 to Rs 10,000, while the UPI Lite wallet limit has been increased from Rs 2,000 to Rs 5,000. 

What Lies Ahead: A Potential Rate Cut in December?

The recent shift in policy stance came with a notably softer tone, indicating greater confidence in the disinflation trajectory. This isn't just a shift in words—it's a big hint that the RBI is feeling more confident about inflation cooling down. They're eyeing a possible rate cut by December 2024, but it's not a done deal yet. We'll need to keep an eye on the economic scorecards, like the GDP data due out in late November and how the inflation numbers roll in for September and October. 

A 25 bps cut could be on the table, but it's far from certain, especially if inflation risks flagged by the Monetary Policy Committee (MPC) come to pass. The RBI will need to closely evaluate three major risks: the impact of geopolitical events, a potential spike in food inflation, and the trajectory of core inflation.

Market Response and Economic Prospects

Following the announcement, the stock markets saw a positive reaction, with the Nifty and Sensex rising and bond yields easing in anticipation of lower borrowing costs. Cheaper borrowing means more spending and more business investment. Everyone's banking (pun intended) on this rate cut because it's the golden ticket for boosting demand across the board. 

Indeed, should the RBI deliver on this, it could serve as a significant growth catalyst, injecting more capital into the economy. All in all, the market’s optimism isn’t just wishful thinking—it’s a pretty calculated bet on better days ahead!

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