RBI Monetary Policy: Repo Rate Steady at 6.5%, Neutral Stance with 4.5% Inflation Forecast

The Reserve Bank of India (RBI) announced its fourth bi-monthly monetary policy for FY25 today, October 9, 2024. After a 3-day meeting, the six-member Monetary Policy Committee (MPC), led by RBI Governor Shaktikanta Das, decided to keep the repo rate unchanged at 6.5%. This marks the tenth consecutive meeting where no changes were made to the repo rate. However, the committee changed its stance to ‘Neutral’ from the earlier ‘withdrawal of accommodation.’

Here are the key highlights of the RBI monetary policy meeting: 

GDP Growth Forecast for FY25 Remains at 7.2%

The RBI also retained its GDP growth estimates for FY25 at 7.2%. Here’s a breakdown of the updated quarterly forecasts:

• Q2 FY25: GDP growth forecast lowered to 7% from 7.2%
• Q3 FY25: Forecast raised to 7.4% from 7.3%
• Q4 FY25: Forecast raised to 7.4% from 7.2%
• Q1 FY26: Forecast raised to 7.3% from 7.2%

Government Consumption on the Rise

Governor Shaktikanta Das highlighted that government consumption is improving, even as the output of the 8 core industries dropped by 1.8% in Q1.

Bond Yields Ease as RBI Changes Stance to ‘Neutral’

Indian bond yields dropped after the RBI shifted its policy stance from ‘Withdrawal of Accommodation’ to ‘Neutral.’ The benchmark 10-year bond yield fell by 5 basis points to 6.7434%.

RBI Governor’s Caution on Inflation

RBI Governor Shaktikanta Das commented that inflation has been brought under control within the tolerance band but warned that caution is needed before making further changes, using the metaphor, “We have to be careful about opening the gate.”

CPI Inflation Estimates for FY25 Unchanged at 4.5%

The RBI kept its overall Consumer Price Index (CPI) inflation estimate for FY25 at 4.5%. However, there were some adjustments to the quarterly forecasts:

• Q2 FY25: Inflation forecast lowered to 4.1% from 4.4%
• Q3 FY25: Forecast increased to 4.8% from 4.7%
• Q4 FY25: Forecast lowered to 4.2% from 4.3%
• Q1 FY26: Forecast lowered to 4.3% from 4.4%

Stock Markets Rise After RBI Monetary Policy Announcement

The BSE Sensex climbed 308.34 points (0.38%) to 81,943.15, while the NSE Nifty 50 increased by 110.30 points (0.44%) to 25,123.45 as of 10:34 AM.

Key Developments on Currency and Lending Practices

During the current financial year, the Indian rupee has mostly stayed stable and is the least volatile currency among emerging market currencies. RBI Governor Shaktikanta Das stated that this lower volatility reflects India’s strong economic fundamentals and an improved outlook for the external sector.

New Initiatives by RBI

The RBI plans to create a database called the RBI Climate Risk System. Additionally, the per-transaction limit for UPI 1 2 3 Pay will increase from ₹5,000 to ₹10,000. The limit for the UPI Lite wallet will rise from ₹2,000 to ₹5,000, and the per-transaction limit for UPI Lite will also be increased from ₹100 to ₹500.

Monitoring Unsecured Loan Segments

Governor Das noted recent concerns about potential stress in unsecured loan segments, such as loans for personal consumption, microfinance, and credit card debt. The Reserve Bank is closely monitoring these situations and will take necessary actions if needed. He urged banks and non-banking financial companies (NBFCs) to carefully assess their individual exposures regarding these loans, focusing on size and quality. Strong underwriting standards and post-approval monitoring are essential.

Call for Self-Correction in NBFCs

Das emphasised that NBFCs prefer self-correction. However, the RBI is keeping a close watch and is ready to take action if necessary. He also suggested that NBFCs should review their compensation practices, variable pay, and incentive structures, as some seem overly focused on targets. This could lead to a negative work culture and poor customer service.

Growth Outlook and Inflation Vigilance

RBI Governor Shaktikanta Das stated that India’s growth story remains strong, but there is a need to stay alert about inflation. He expressed greater confidence that inflation is decreasing, but he acknowledged that there are still significant risks involved. The RBI has decided to change its policy stance because it believes there is a good balance between supporting growth and managing inflation.

Das explained that shifting to a neutral stance allows the RBI more flexibility and options in making future decisions. He emphasised that this change in approach comes at an appropriate time for the economy.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.