MPC Meeting: Will RBI change its stance on Feb 8?

Clamour for rate cuts: The Reserve Bank of India is scheduled to meet from Feb 6 to Feb 8 to decide the trajectory of the repo rate- the key policy rate- which stands at 6.5 per cent now. All analysts and economists believe that RBI will not cut the repo rate, in a bid to bring down inflation under 4 per cent.

The State Bank of India in its latest report said that the Reserve Bank of India will likely continue the pause stance in the upcoming Monetary Policy Committee meeting. 

“We expect the RBI to continue the pause stance in upcoming policy…Strong US non-farm payroll data and wages seem to have pushed back on market expectations for a quick pivot to rate cuts…First rate cut on the table from June ‘24… Aug ‘24 looks the best bet now,” it said in its latest report. 

The apex bank had kept the repo rate unchanged at 6.50 per cent for the fifth time in a row. And hopes are high that this time as well the bank will not go for any rate cut, having a full year with the repo rate at 6.5 per cent. The RBI had increased rates by 250 bps from May 2022 to December 2022. 

Inflation  & the stance

The SBI report stated that CPI is expected to come around 5.4 per cent in FY24 and 4.6 per cent to 4.8 per cent in FY25. “While the inflation decelerated significantly in 2024 compared to 2014, the inherent composition remains the same. Food contribution, then and now, remains the same,” it said. 

India’s retail inflation had increased to 5.6 per cent in December from 5.55 per cent in November. 

The apex bank has since April 2022 been focused on a "withdrawal of accommodation" stance in a bit to tame the red-hot, soaring inflation.

The change in stance to neutral is expected on account of softening core inflation.  The core inflation which excludes food and fuel is hovering well below the comfortable range of 4 per cent. The core inflation in December was at 3.8-3.9 per cent, declining from 4.5-4.6 per cent in November. 

“ The sustained softening of core inflation is seen as a primary reason for some external members of MPC to voice for changing stance to Neutral,” an economist said. The stance pointed towards withdrawal accommodative stance is also expected by some economists. However, Nomura expects the RBI to change its stance by June and hopes for the rate cut by August. 

Neutral Stance

The RBI is expected to change its stance to Neutral. Simply put, the RBI picks up a Neutral stance when the apex bank prioritises both growth and inflation at the same. A neutral stance also means that the RBI can either hike key interest rates and also go for rate cuts based on incoming data.  The stance neutral guides the market that there can be any rate cut and a hike.