RBI monetary policy: With no rate cuts in October, is RBI falling behind the curve? Experts weigh in | Stock Market News

RBI monetary policy: Controlling inflation is like taming a wild horse—a task that’s never easy and requires constant vigilance. Just ask the RBI Governor Shaktikanta Das.

Today, Das announced that the inflation horse has finally been led back to the stable, inching closer to the target range. But he warned that opening the gate too soon could see the horse bolt once more. “We must keep the horse under a tight leash so that we do not lose control,” Das exhorted in his monetary policy speech on Wednesday, October 9.

When the US Federal Reserve slashed its benchmark rates by 50 basis points in September, it sparked hopes that the RBI might soon follow suit, with a potential rate cut on the horizon in October. Although the RBI’s decisions aren’t strictly tied to the Fed’s moves, history shows emerging market central banks often dance to the Fed’s policy beats.

However, choosing its own path, the RBI decided not to shadow the Fed fully; instead, it kept its eyes firmly on both domestic and global macro conditions. On Wednesday, the central bank held the repo rate steady at 6.50 per cent. However, in a subtle tone shift, it left the door ajar for future rate cuts by changing its policy stance to ‘neutral’ from ‘withdrawal of accommodation’.

“The MPC decided unanimously to change the stance to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth,” Das announced.

With the RBI opting to keep interest rates steady in October, the question arises—has it fallen behind the curve?

A move in the right direction

Even as the Indian economy remains on a strong footing and inflation has come closer to the RBI’s 4 per cent target, the central bank does not want to shift its focus away from the evolving equation of inflation and economic growth.

Despite its significant decline from the pandemic highs, Headline inflation has been slow and uneven. RBI observed that food inflation pressures could see some easing later in this financial year, but adverse weather events continue to pose contingent risks.

The MPC’s concerns appear to be dominated by the uncertainty swirling around adverse weather conditions, geopolitical tensions, and volatile crude oil prices.

“The prevailing and expected inflation-growth balance has created congenial conditions for a change in monetary policy stance to neutral. Even as there is greater confidence in navigating the last mile of disinflation, significant risks – I repeat significant risks – to inflation from adverse weather events, accentuating geopolitical conflicts, and the very recent increase in certain commodity prices continue to stare at us. The adverse impact of these risks cannot be underestimated,” said Das in his speech on Wednesday.

Experts say the RBI Governor is on the right path, and deferring interest rate cuts is justified at this juncture.

“We believe the RBI’s decision to defer entering a rate-easing cycle is justified, given the trade-off between growth and inflation,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

Hajra underscored that while some indicators suggest that growth is not as strong, the bigger question is whether this is a temporary issue and if growth will pick up in the second half of the current fiscal year.

The chief economist of Anand Rathi Shares and Stock Brokers believes that favourable tailwinds, such as improved agricultural output, increased government spending, and moderate crude prices, should prevent the recent slowdown from being sustained.

“The shift to a neutral stance leaves the RBI the option to cut rates in December 2024 if the slowdown persists, but it can also choose to hold off if growth gains momentum. Given the ongoing uncertainty in geopolitics and weather conditions, this is a prudent approach,” said Hajra.

According to Madhavi Arora, Chief Economist at Emkay Global Financial Services, no rate action, in conjunction with stance change to neutral with stress on being ‘actively disinflationary’ is indeed RBI’s best bet to prep ground for the start of a shallow easing cycle, possibly but not necessarily from December.

Dharmakirti Joshi, Chief Economist at CRISIL, pointed out that risks and uncertainties persist globally, with escalating tensions in the Middle East, weather uncertainties and the outcome of US elections in focus. This is why the RBI took a cautious approach and kept its powder dry.

The impact on the Indian stock market

At first glance, the RBI’s policy stance change appears to have pleased the market. The benchmark index Sensex jumped 0.80 per cent, while the mid-and small-cap indices on the BSE jumped up to 2 per cent.

Experts say the RBI’s status quo on policy rates is not negative for market sentiment and reflects the central bank’s commitment to balancing growth and inflation dynamics.

Going ahead, Q2 earnings of India Inc., US Fed rate cuts, evolving situations in the Middle East, news flow around the US presidential election and macroeconomic prints will continue influencing market movement.

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