• The Reserve Bank of India (RBI) has maintained the repo rate at 6.5% and shifted its policy stance to neutral.
• This decision, supported by five of the six members of the Monetary Policy Committee (MPC), indicates a balance between inflation and growth.
• The decision comes after the repo rate remained unchanged at 6.50% in the last nine meetings since February 2023.
• The RBI's decision reflects readiness to act based on future economic data and inflation trends, signaling a possible rate cut in the future.

The Reserve Bank of India (RBI) has made a significant move by maintaining the repo rate at 6.5% while shifting its policy stance to neutral. This decision, announced by RBI Governor Shaktikanta Das, signals the possibility of the first rate cut in the December policy. The decision was made during the RBI's three-day monetary policy committee (MPC) meeting held from October 7-9, 2024.

The shift to a neutral stance suggests that the central bank is now open to either lowering or raising the interest rate, indicating that the policy priority is balanced between inflation and growth. This is a significant shift from the withdrawal of accommodation stance that had been in place for the past two years.

The decision to maintain the repo rate was supported by five of the six members of the MPC, while all six members voted in favor of the shift in policy stance. This decision aligns with a poll conducted by Mint, which revealed that 9 out of 10 economists expected the rates to remain unchanged.

MPC Sees New Faces, Maintains Repo Rate

Notably, this is the first meeting of the six-member RBI MPC after half the members were changed last week. The Centre appointed three new members to the RBI's monetary policy panel earlier in October. These three external members of the six-member panel are routinely nominated and appointed by the central government. The new members, Bhattacharya, Kumar, and Singh, replace Shashanka Bhide, Ashima Goyal, and Jayanth R Varma as the external members.

The decision to maintain the repo rate and shift the policy stance comes after the central bank kept the repo rate unchanged at 6.50 per cent in its last nine consecutive meetings since February 2023. This was done with a view to balance inflation and economic growth.

The RBI's decision was influenced by several factors, including food inflation pressures, which have a significant weight in the consumption basket and can affect household inflation expectations. The need to balance inflation control with supporting economic growth was also a key consideration, given that high food inflation could lead to spillovers into core inflation and affect overall price stability.

RBI's Decision Influenced by Domestic and Global Factors

The potential impact of external factors, such as global economic conditions, on India's economy and inflation was also taken into account. The recent history of keeping the repo rate unchanged to stabilize both inflation and economic growth was another factor in the decision. The recognition that while core inflation had fallen, high food inflation and uncertain inflation expectations required caution.

The potential for future rate cuts, possibly in December, depending on the evolution of data and economic conditions, was also a factor in the decision. These factors collectively indicated the need for a cautious approach, with the central bank ready to act in either direction based on future data.

The RBI's decision to maintain a neutral stance and not cut rates immediately was also influenced by the recent performance of the Indian economy. RBI Governor Shaktikanta Das highlighted factors like private consumption and investment recovery, a rebound in rural spending, bank credit to agriculture, and manufacturing business improvement, including the small and medium (SME) segment firms, for his optimism on India's growth outlook.