RBI considers shifting policy stance to 'neutral' amid core inflation easing: Economists

RBI policy stance: Economists suggest that a continuous decline in India's core retail inflation and subdued inflationary pressures may lead the Reserve Bank of India's rate-setting panel to switch its policy stance to 'neutral' as early as next month.

The RBI monetary policy committee (MPC) has maintained the key policy repo rate unchanged since February 2023, following a 250 basis points increase between May 2022 and February 2023 to combat high inflation. The MPC, since April 2022, has been focused on the "withdrawal of accommodation" as part of its policy stance to align inflation with its 4 per cent target.

Economists at ICICI Securities Primary Dealership noted, "There is a compelling case for a shift in stance based on the inflation outlook, global financial conditions, liquidity situation, and real policy rates. We attach a high probability that a couple of external members (of the rate-setting panel) may vote for such a shift in the next meeting."

The upcoming rate-setting panel meeting is scheduled for February 6-8.

Headline retail inflation in India increased to 5.69 per cent year-on-year in December from 5.55 per cent in the previous month. However, core inflation, excluding volatile food and energy prices, fell to 3.8 per cent-3.9 per cent from 4.05 per cent-4.2 per cent in November, according to economists.

Nomura reported that core inflation has moderated to a near-four-year low, despite robust economic growth and repeated supply-side food shocks. Nomura anticipates the headline inflation to fall to around 5 per cent in January and core inflation to 3.5 per cent.

The expectation at Nomura is that the MPC will reduce policy rates by 100 basis points between August and March, with risks leaning towards earlier rate cuts.

Citi economists, while considering April as their base case for a change in stance, highlight that February has now become a "live policy."

"A sustained fall in core inflation is likely to make those voices louder in the February meeting," stated Citi economists, referring to the possibility of changing the monetary policy stance to neutral, which was discussed and highlighted by external members in the December MPC meeting.

(With Reuters inputs.)