RBI Holds Rates, Experts Expect Cuts: Monetary Policy Analysis

New Delhi, Oct 9 (PTI) The Reserve Bank's decision to hold rates and adopt a 'neutral' monetary policy stance is a pragmatic move, and there are expectations of interest rate cuts in coming months, according to industry players.

The central bank kept its key interest rate unchanged on Wednesday but took the first step towards a rate cut as it eased its relatively hawkish policy stance to 'neutral'.

The monetary policy committee, which included three RBI officials and an equal number of new external members, voted five-to-one to keep the benchmark repurchase or repo rate - which governs the interest rate of home, auto, corporate and other loans - at 6.5 per cent for a 10th straight policy meeting.

Describing the RBI monetary policy review as "realistic and pragmatic", industry body Assocham said the change in stance to 'neutral' from 'withdrawal of accommodation' has given a signal about interest rates reversing downwards in the next few quarters.

"The change in stance to 'neutral' from 'withdrawal of accommodation' should be seen as a positive development pointing towards the RBI's flexible monetary policy to be driven by the unfolding domestic and global events," said Assocham Secretary General Deepak Sood.

Deloitte India economist Rumki Majumdar said while the US Fed's decision to reduce policy rates in September has created some elbow room to manoeuvre policy rates, it is prudent to monitor inflation and currency movements before the RBI decides to follow suit.

"The RBI may go for a rate cut in December if it has to. The price movements during the festive months will be critical," she opined.

Krisumi Corporation Managing Director Mohit Jain said while the real estate industry was hoping for an interest rate reduction, a status quo is the next best outcome for the industry.

"Stable rates ensure consistent EMIs, giving homebuyers the confidence to plan their purchases. Furthermore, the expectation of potential rate cuts in the coming months is also boosting optimism in the real estate market and we expect the robustness in demand to continue over the next few years," he added.

The status quo on the repo rate was no surprise. The MPC rightly decided to wait for critical incoming information related to geo-political developments, important election results, commodity price trends and domestic growth-inflation dynamics in the coming months, Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank, said.

"The change in stance to 'neutral' after a more hawkish stance of 'withdrawal of accommodation' for nearly two and half years is significant and appropriate. However, it should not be interpreted as a precursor to a cut in the repo rate necessarily in the next policy itself. MPC's action will remain data dependent," Sanyal added.

Bajaj Broking Managing Director Manish Jain emphasised that looking at the current geo-political scenario, the RBI had 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. Rural demand is trending upwards while urban demand continues to hold. Investment activity remains buoyant with government capex rebounding, which provides a breather," Jain said.

The RBI kept its inflation forecast unchanged at 4.5 per cent for the 2024-25 (April 2024 to March 2025) fiscal. It also kept its GDP forecast unchanged at 7.2 per cent.

Biz2Credit and Biz2X co-founder and CEO Rohit Arora said the RBI's decision on the repo rate highlights a prudent approach to managing the economic landscape, balancing inflation control with the need for sustained growth.

For the SME sector, this stability in borrowing costs allows businesses to better plan their financials, especially in an environment where cash flow management and long-term investments are critical, he said.

The RBI also highlighted concerns about the geo-political risks and the weather-related shocks, along with its adverse impact on commodity prices, particularly crude oil where India's import dependence is very high.

SBM Bank India Head Treasury Mandar Pitale opined that there is a hawkish undertone to policy verdict in terms of a persistent focus on tight vigilance on the near-term trajectory of inflation to safeguard against systemic risks to the inflation outlook.

"The sustained momentum in Domestic growth, with private consumption and investment growing in tandem, are instrumental in providing space to MPC to focus on inflation, ensuring its durable descent to the 4 per cent target amidst expectation of near-term spikes," Pitale said.

In another customer-friendly initiative, the RBI announced a beneficiary account name look-up facility for Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT) systems will be introduced.

Payment Systems like UPI and IMPS provide a facility for the remitter to verify the name of the receiver (beneficiary) before initiating a payment transaction.

"This proposed initiative by RBI to enable remitters to verify the name of the beneficiary before initiating a payment transaction is a critical step in enhancing payment security. Extending this to NEFT and RTGS systems would drastically reduce fraud and misdirected payments, adding trust in digital financial services.

"Apart from transparency on the account number and IFSC code, the visibility on the beneficiary's name will help bring confidence among consumers and businesses, further mitigating the risk of errors during fund transfers and ensuring a smooth transaction experience," Amit Relan, co-founder and CEO, mFilterIt, said.