The Reserve Bank of India (RBI) is expected to maintain the status quo on both policy rate and stance in its upcoming October policy meeting for the tenth consecutive time. According to a report by the Bank of Baroda (BoB), the Monetary Policy Committee (MPC) is likely to wait for more clarity on the inflation trajectory before considering a monetary easing path. Despite inflation falling below the RBI’s target of 4 per cent for the past two months, the policy rates are expected to remain unchanged in the upcoming meeting.
The recent drop in inflation was attributed to a “positive base effect”, leading to a cautious approach from the RBI regarding a rate cut in the near future. The report suggests that a rate cut may only be considered in the December policy meeting once the apex bank is confident that inflation has moderated on a sustainable basis. The outlook on food inflation is positive due to a normal monsoon, with expectations of stable food prices supported by the arrival of fresh crops.
Core inflation is expected to remain stable at or below 4 per cent, indicating that broader inflationary pressures in the economy are under control. However, concerns about unseasonal rainfall during the monsoon withdrawal potentially damaging crops and pushing food prices higher again are raised in the report. Despite these challenges, India’s macroeconomic fundamentals remain robust, with expected growth of 7.3-7.4 per cent in FY25, prompting the MPC to monitor risks to the inflation trajectory before considering rate cuts.
On the domestic growth front, high-frequency indicators show a mixed picture of the economy in Q2 FY25. Manufacturing PMI declined in September, vehicle sales have moderated, and core sector output contracted for the first time since February. However, GST e-way bills have shown steady growth, and the services sector continues to expand. The weakness in domestic activity is attributed to seasonal factors during the monsoon period, but India is still projected to achieve strong growth in FY25.
In the previous MPC meeting, the RBI opted to maintain the policy rates at 6.5 per cent amidst concerns about inflation persisting above the target range. The decision to keep the repo rate steady reflects the central bank’s cautious approach in addressing inflationary pressures while balancing economic growth. The upcoming October policy meeting will provide further insights into the RBI’s stance on monetary policy and the Indian economy’s growth trajectory.
