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RBI's decision to keep repo rate unchanged expected, but shift to neutral raises hopes for rate cut later: Industry reacts
Photo courtesy: File image/UNI

RBI's decision to keep repo rate unchanged expected, but shift to neutral raises hopes for rate cut later: Industry reacts

| @indiablooms | 09 Oct 2024, 08:32 pm

Mumbai: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), in its meeting held from October 7 to 9, announced on Wednesday that the benchmark repo rate will remain steady at 6.5 percent.

This marks the tenth consecutive review where the rate has not been altered.

Signalling a shift in its approach, the six-member MPC revised its monetary policy stance from "withdrawal of accommodation" to "neutral," while maintaining its projections for retail inflation and GDP growth for FY2025 at 4.5 percent and 7.2 percent, respectively.

The decision to hold the repo rate steady was backed by five of the six committee members, with Nagesh Kumar, the newest member and Director of the Institute for Studies in Industrial Development, being the lone advocate for a 25-basis point reduction.

RBI Governor Shaktikanta Das noted that inflation in September is expected to spike sharply, driven by rising food prices and an unfavorable base effect.

He further warned that while inflation may ease in the final quarter, risks remain due to unpredictable weather patterns and global geopolitical tensions.

Reactions

Senior Fund Manager Shriram AMC Deepak Ramaraju noted that RBI may continue to hold interest rates unchanged in Q3 FY 2025. Based on inflation moderating below 4.5% and moderation of geo-political concerns the RBI may undertake a rate cut decision in Q4 FY 2025.

The bond and equity markets are expected to react positively in the medium term. Though short-term biases of FII may continue towards Chinese markets keeping pressure on the equity markets, the resilient domestic flows can defy deep corrections in the equity markets despite high valuations.

The markets may trend positive with subsequent rate cuts by the US Fed. However, stock-specific corrections can be expected based on the earnings performance. Overall, in the short term, one can expect a buy-on-dip approach with a neutral stance by RBI.

Vaidyanathan Srinivasan, Operating Partner – Essar Capital said that the decision to keep the repo rate unchanged indicates a cautious approach to managing inflationary pressures while ensuring economic stability.

“A steady rate helps businesses like ours plan capital deployment better by fostering long-term growth and investment opportunities. For the infrastructure and energy sectors, stable borrowing costs are crucial for financing large-scale projects and driving India's continued development. This policy provides confidence to sustain economic momentum and confident capital allocation," he added.

According to Sandeep Yadav, Head - Fixed Income, DSP Mutual Fund, the stance to keep the repo rate unchanged in this MPC was expected. “Global yields and central banks will continue to weigh on RBI, especially since our macro parameters are somewhere in the middle and do not merit immediate action.

“We believe rate cuts would occur soon, but will not hazard guess a timeline. If US data weakens, and central banks across world continue the rate cut trajectory then RBI has no reason not to cut rates.  If globally data strengthens and central banks move to ‘wait and watch’, our rate cuts are likely to be delayed. We remain long on bonds.”

Manish Chowdhury, Head of Research, StoxBox noted that the high frequency indicators showing signs of fatigue recently, the upcoming festive season would be a crucial factor in deciding the possibility of any downward revision to economic growth forecast. “Though the central bank has tried hard to downplay an early rate cut expectation, our sense is that a rate cut in Q4FY25 is on cards, with the probability of the event happening in December looking evenly balanced,” he stated.

Vaibhav Shah, Fund Manager,Torus Oro PMS said the change in stance to Neutral from Withdrawal of accommodation likely indicated that the MPC has set the base for rate cuts either in December or early next year, as inflation seems to be on a continuous downward trajectory.

“The projections related to inflation and growth have not been altered significantly, leading on confidence on achieving the inflation path without any disrupting growth engine. MPC had a mention of cooling food prices which were the key volatile variable in the overall food inflation equation, which should help achieve the overall inflation target,” he added.

Manish Jain, Managing Director at Bajaj Broking underscored, “Looking at the current geo-political scenario, RBI had a little choice but to remain focused on inflation and balance growth at the same time. By keeping the repo rates unchanged and shifting from ‘accommodation’ to ‘neutral’, the MPC has taken a very calculated stance and is being watchful. The rural demand is trending upwards while urban demand continues to hold. Investment activity remains buoyant with government capex rebounding, which provides a breather.”

Venkatraman Venkateswaran - Group President & CFO, Federal Bank stated “Barring any major upheaval in geo-politics and other external factors, we may see the first action on Repo rate in Dec MPC meeting. Near term data points will form the basis for rate cut.”

Vijay Kuppa - CEO, InCred Money said RBI's focus remains clear—steering the economy toward a durable alignment of inflation with its target amidst geopolitical tensions and stabilizing domestic inflationary pressures. Given the current macroeconomic environment, further rate cuts in the upcoming quarters seem unlikely.

RBI’s decision signals flexibility, which is crucial as global commodity prices, including crude oil and metals, witness volatility. This balanced approach ensures sustained economic growth without the risk of overheating.

With deposit rates at elevated levels, this presents an ideal opportunity for locking in high-yield fixed deposits. At the same time, high borrowing costs make a compelling case for increasing debt allocations in investment portfolios, offering a buffer against potential equity market corrections which might occur due to geopolitical tensions.

Executive Vice Chairman, Shriram Finance said, "RBI’s decision to change its stance from ‘Withdrawal of Accommodation’ to ‘Neutral’ is encouraging and raises hopes of a possible rate cut in the near future.”

The Governor's guidance to NBFCs marks a critical moment for the sector's growth, and likely lower cost of funds is going to benefit NBFC sector and ultimately the customers, he added.

Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance said the change to a neutral stance suggests the potential for future rate cuts, as RBI Governor Shaktikanta Das indicated. Governor highlighted that domestic growth remains robust, driven by private consumption and investment, providing room to focus on achieving the 4% inflation target. The MPC will closely monitor inflation trends to balance growth and price stability. 

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