Change in stance provides space to watch out for the uncertainties on the horizon: RBI Guv Das in MPC meeting

Newly inducted monetary policy (MPC) committee member Nagesh Kumar cited successful anchoring of inflationary expectations and flagging industrial demand in both domestic as well as export markets as reasons for voting for a 25 basis points (bps) repo rate cut at MPC’s latest meeting. 

Kumar, who is Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi, was the lone MPC member to vote for a rate cut even as the other five members voted to keep the policy repo rate unchanged at 6.50 per cent. 

When it came to the resolution on change in the monetary policy stance from “withdrawal of accommodation” to “neutral” and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth, all six MPC members were on the same page, voting unanimously.  

“Given that inflationary expectations have been successfully anchored, and industrial demand in both domestic as well as export markets is flagging, a rate cut could help to revive demand and help boost private investment.  

“I believe that it is an opportune moment for RBI to start the process of normalizing the monetary policy,” Kumar said. RBI on Wednesday released the minutes of the MPC meeting, which was held during October 7 to 9, 2024.  

Along with Kumar, Saugata Bhattacharya, Economist, Mumbai; and Ram Singh, Director, Delhi School of Economics, Delhi, are new external members of MPC. 

Stability and Strength

Governor Shaktikanta Das said overall, the Indian economy presents a picture of stability and strength, with the balance between inflation and growth well-poised.  

“Despite the near-term uptick in inflation, the outlook for headline inflation towards the later part of the year and early next year points to further alignment with the 4 per cent target.  

“Thus, the conditions are appropriate for a change in monetary policy stance to neutral from withdrawal of accommodation. This would provide greater flexibility and optionality to monetary policy to act in accordance with the evolving outlook,” Das said.  

He observed that the change in stance also provides space to watch out for the uncertainties on the horizon – ranging from heightened geo-political tensions and volatile commodity prices to risks of adverse weather in food inflation.  

“These are significant risks and their impact cannot be underestimated. We need to remain vigilant. At this stage of the economic cycle, having come so far, we cannot risk another bout of inflation.  

“The best approach now would be to remain flexible and wait for more evidence of inflation aligning durably with the target. Monetary policy can support sustainable growth only by maintaining price stability,” the Governor said. 

MD Patra, Deputy Governor, opined that it is possible to envisage that the persistence of inflationary pressures experienced so far could dissipate with a less restrictive stance of monetary policy. This assessment gains credence with the success in squeezing out inflation persistence that has been achieved.  

“It would be apposite in this meeting to undertake an appropriate recalibration of the monetary policy stance that reflects an openness to reducing the degree of policy restraint if inflation evolves along the trajectory set out in the baseline projection.  

“At the same time, reducing restraint too quickly may negate the progress made on disinflation. Hence, a gradual wait-and-assess approach to removing policy restraint in terms of the policy rate remains appropriate as long as inflation is not lastingly close to its target,” Patra said. 

Bhattacharya emphasised that given the current heightened uncertainty, both global and domestic, a very cautious and calibrated approach to easing is called for; the costs of a “policy error” are likely to be large.  

“The multi-dimensional implications of a repo rate cut at this time and in the future needs careful evaluation. One of these might be a further and excessive easing of financial conditions; these conditions, to an extent, have already in the recent past resulted in a de facto easing of restrictive policy,” he said.  

In addition, structural system liquidity has shifted over time from deficit to surplus, helping to anchor overnight and short-term rates close to the repo rate. Updates inter alia on the ongoing festive season sales and the results of listed private sector corporates for the July-September quarter of FY25 might provide more clarity on evolving demand conditions, the Economist said. 

Fundamental growth drivers

Singh noted that fundamental growth drivers and the mainstay of aggregate demand – consumption and investment demand – are gaining momentum. The core components of aggregate demand — private consumption and gross fixed capital formation, have remained strong with over 7.0 per cent growth in Q1, suggesting resilience of the growth. 

“Going forward, the moderation in headline inflation can be unsteady in the near term due to adverse base effects. Food inflation is expected to moderate later this financial year because of strong kharif and rabi sowing on top of adequate buffer stocks. Adverse weather events, however, remain un-insurable risks to food inflation,” he said. 

Rajiv Ranjan, Executive Director, RBI, observed that keeping in mind the balance in the growth-inflation outlook, the risk-reward for a change of stance to neutral is favourable now. This would allow flexibility to adapt and operate in accordance with the evolving situation.  

“But change in stance in no way implies dropping the guard on inflation. Considering the uncertainties still prevailing on the global front, a cautious data dependent approach with regard to further course of monetary policy actions is called for.  

“Between now and December, we will have greater clarity on some of the uncertainties – US elections, geopolitical risks and Chinese fiscal stimulus and its impact on global commodity prices. At this juncture, India’s resilient growth story helps us to continue our determined focus on inflation and keep the policy rate unchanged at 6.5 per cent,” he said.