RBI MPC announcement: Will RBI Governor Shaktikanta Das cut the repo rate?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to make key announcements on Friday after its three-day meeting today. The six-member panel, led by Governor Shaktikanta Das, will reveal the decision on the repo rate, which has been the talk of the town for the past few days.

This meeting comes at a time when India faces several economic challenges, such as slower GDP growth and high inflation.

WHAT TO EXPECT?

This is the fifth MPC meeting for FY25, with earlier meetings in April, June, August, and October. Key highlights from the October meeting included maintaining the repo rate at 6.5%, shifting the stance to ‘neutral,’ and holding other key rates steady. The upcoming meeting will reveal whether the central bank adjusts the repo rate or maintains its current stance.

The RBI has kept the repo rate unchanged at 6.5% since February 2023. Many analysts believe that the central bank is likely to maintain this stance for now. However, some suggest that the slowing economy and moderating inflation might pave the way for policy easing in the future.

In recent weeks, several key figures, such as Chief Economic Adviser V Anantha Nageswaran, Commerce Minister Piyush Goyal, and Finance Minister Nirmala Sitharaman, have highlighted the importance of reducing borrowing costs.

Despite these calls, the RBI has continued to focus on addressing food inflation, which remains a major influence on its monetary policy approach. However, Union Minister Piyush Goyal had earlier questioned the impact of food inflation on interest rate decisions, calling the link ‘absolutely flawed.’

Analysts are divided on whether the RBI will cut the repo rate during this meeting or adopt a more cautious approach.

“The likelihood of a rate cut in December is like a flip of a coin,” said Sahni. “Inflation remains a concern, but the GDP slowdown has built pressure for growth-supportive measures.”

Others suggest a “dovish hold,” where the RBI signals a willingness to cut rates in the future while maintaining the current rate.

“We expect a dovish stance with more members voting for a cut compared to the 5:1 ratio at the last review,” said Rao from DBS Bank. “A rate cut is more likely at the February meeting, but the recent GDP miss might push the MPC to act sooner.”

The RBI faces a tough balancing act as it weighs the need to support growth against the risks of high inflation and external pressures.

Vishal Kumar, Senior Manager at Aranca, highlighted the dilemma, saying, “If the RBI does not cut rates, it risks worsening the GDP slowdown. However, a rate cut could weaken the rupee further. The RBI may opt for easing liquidity by announcing a 50-basis-point CRR cut, injecting Rs 1.2 lakh crore into the banking system, while holding the repo rate steady to manage inflation risks.”

Jyoti Prakash Gadia, MD at Resurgent India, pointed out, “Given food inflation above 6% in October and GDP growth of 5.4%, the time is not right for a rate cut. Despite the RBI’s shift to a neutral stance in October, it may maintain a pause until February, allowing more clarity on inflation trends and GDP data for a considered decision.”

Narinder Wadhwa, MD of SKI Capital, added, “The RBI faces pressure to balance growth and inflation. Global factors like the US Fed’s rate cuts and China’s economic stimulus provide some flexibility, but domestic inflation and fiscal conditions will take precedence. A smaller rate cut or maintaining the status quo is likely, as the RBI focuses on navigating this challenging landscape.”

KEY ECONOMIC CHALLENGES

Slower GDP growth: India’s Q2 FY25 GDP growth was 5.4%, below the projected 6.5%, marking the slowest growth in seven quarters.

High inflation: Consumer Price Index (CPI) inflation rose to 6.21% in October, well above the RBI’s December projection of 4.8%.

Increasing liquidity: Systemic liquidity has declined, pressuring deposit and credit growth.

Global context: Central banks like the Federal Reserve and ECB have initiated rate cuts, providing a contrast to the RBI’s current approach.

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