RBI likely to keep repo rate unchanged at 6.50% for tenth straight time

The Reserve Bank of India is likely to keep repo rate unchanged at 6.5 per cent in the policy meeting on Wednesday, for tenth straight time since February 2023. More than 80 per cent of economists say no change is expected in the future, while few expect the central bank to shift its stance into neutral that might bring chances for rate cuts because of slowing economic growth and softer global interest rates.

A dozen economists polled by Reuters expect a cut of 25 basis points, and one is expecting the rate to be trimmed down to 6.15 per cent. The Nomura economists assign 55 per cent chances to a rate cut in October but admit it's a close call. Analysts say that recent US Federal Reserve’s  50 basis point rate cut may influence the RBI to begin cutting rates even before 2025 as was widely predicted.

ICRA's Chief Economist, Aditi Nayar, says the undershooting of the first quarter and second quarter GDP growth as well as the CPI inflation would make the RBI shift to a neutral stance during October policy review.

Economic Performance and Inflation

India's GDP growth lost a bit of steam to 6.7 per cent in Q1 (April-June) of the current fiscal year as it cut government spending during elections. However, India remains the world's fastest-growing major economy. Some other recent high-frequency indicators include the manufacturing PMI dived to lowest levels in eight months and services PMI dropped to a 10-month low.

Annual retail inflation was below the RBI 's target for the second month in succession at 3.65 per cent in August, marginally higher than July's revised 3.60 per cent. Still, according to a Reuters poll, inflation will pick up again, averaging 4.5 per cent this fiscal year and 4.3 per cent for the next.

Bank of America thinks that the RBI has scope to cut rates considering that growth is slowing down and expectations of deflation are rising. They expect 100 basis points cut by December 2025 with the first cut in December 2024.

Changes in RBI Rate Panel

This Monetary Policy Committee (MPC) meeting will attract notice not only for any pivot in RBI policy but also for the cue coming from this new set of external members. Every four years, the RBI reconstitutes the panel itself, which may induce shifts in voting patterns. Of the six members appointed by RBI, two had voted to cut rates.

Economists at Yes Bank said it would be crucial in that the board will have a chance to assess the new members at a time when the economy is slowing down and inflation risks are limited. Some economists feel that at least one of the new members may vote for a rate cut.