RBI Monetary policy: A change in stance possible in August? Will RBI cut rates ahead of US Fed

In line with expectations, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) maintained a status quo on the repo rate and poly stance on Friday, June 7. However, the six-member MPC's voting pattern hinted that the members have started considering changing the policy stance and rates in the coming months.

The six-member committee of the central bank, with a majority of 4:2, decided to keep the benchmark repo rate unchanged at 6.5 per cent for the eighth consecutive time.

Also Read: RBI monetary policy: Inflation to growth outlook - 5 key highlights from RBI MPC outcome

Economists and experts pointed out that the central bank may pivot in the August and October policy meetings.

"RBI’s status quo on rates and stance was in line with market expectations, but the split in voting patterns clearly shows the increasing probability towards a pivot in the policies ahead," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

"We believe the robust growth will allow the MPC to remain in a wait-and-watch mode until better clarity comes from monsoons and the quality of expenditure from the Budget. We see room for stance change in the August policy with a plausible easing from the October meeting," said Bhardwaj.

Also Read: RBI Monetary Policy: As central bank keeps repo rate unchanged, here’s what experts make of the decision

RBI's move will be fact and data-driven, but expectations have been rising that evolving macro conditions, including the fall in inflation, may trigger a change in policy stance.

“Robust growth provides the policy space for the RBI to keep the repo rate unchanged and focus on inflation. Nevertheless, the current growth-inflation dynamics favour shifting to a neutral policy stance at the next meeting," said Vikram Chhabra, Senior Economist, 360 ONE Asset.

Also Read: RBI keeps repo rate unchanged at 6.5%: What MPC policy means for home buyers

RBI Governor Shaktikanta Das projected CPI inflation for FY25 at 4.5 per cent, with Q1 at 4.9 per cent, Q2 at 3.8 per cent, Q3 at 4.6 per cent, and Q4 at 4.5 per cent. Besides, he raised RBI's GDP growth forecast for FY25 to 7.2 per cent from 7 per cent earlier.

Also Read: RBI monetary policy: MPC keeps FY25 inflation forecast unchanged at 4.5%

RBI has been keeping rates at the current level since February 2023. Even as India's economic growth remains resilient, a prolonged period of elevated interest rates can drag the growth indicators down.

"A normal or above-normal monsoon is expected to lower and contain food inflation. However, a slowdown in private consumption may impact growth and undermine the recent revival in private capital expenditure. Adopting a neutral policy stance will allow the RBI to respond swiftly with a rate cut if warranted by the data. We anticipate 50-75 basis point-rate cuts in FY25," Chhabra said.

Also Read: RBI Monetary Policy: ‘Decision to maintain policy rate reflects caution, but…’ here’s what experts say

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes the RBI may cut rates as early as the next policy meeting.

"MPC’s decision to keep policy rates unchanged, though expected, has a surprise element since two members out of six were in favour of rate cut. Jayant Varma was in favour of a rate cut in the last meeting also. This means the number of members favouring a rate cut is increasing. So, a rate cut is likely in the next meeting," said Vijayakumar.

There is a general sense that the RBI follows the US Federal Reserve in monetary policy matters. Experts have been saying that the RBI may not start rate reductions before the US Fed does so.

However, in his statement on Friday, Governor Das said that while the RBI considers the impact of the policy moves of developed economies' central banks, domestic factors will primarily decide the course of action.

"While we consider the impact of monetary policy in advanced economies on Indian markets, our actions are primarily determined by domestic growth-inflation conditions and the outlook," said Das.

Even though it is not a clear indication, some experts see it as a cue that the central bank may tweak its monetary policy before the US Fed.

“No one really expected RBI to cut rates before the Fed, but the governor made it a point that he isn’t going to follow the footsteps of the Fed and prefers to play the game according to the domestic conditions,” said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.

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