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Below the Reaction on today`s RBI Monetary Policy by Ms. Anitha Rangan, Economist, Equirus

"As a first step towards getting closer to rate accommodation, RBI changes its stance to “neutral” from withdrawal of accommodation. The policy is however unchanged at 6.5%. Nevertheless, the vote was 5-1 for keeping policy unchanged.  RBI noted that current and estimated dynamics of growth-inflation balance is driving the change in stance. Within this RBI’s growth and inflation target for FY25 is unchanged at 7.2% and 4.5%.

However we would think that next move is unlikely to be a rate cut, at this juncture, RBI will only keep its options open towards accommodation. The hawkish points emanate from the points around a) Inflation is on a declining path although there is some distance to cover with upside risks from geo-politics and weather while the agricultural outlook is buoyant and positive for food prices. b) RBI keeps its guard on noting that “we have to be very careful of opening the gate and need to keep the horse to a tight leash” and mentioning that RBI cannot be complacent with the rapidly evolving global conditions. The change in stance rather gives greater flexibility and optionality to act in sync with the evolving outlook.

The signal that RBI is warming up or getting more comfortable towards accommodation is the point around transmission to credit markets being satisfactory. However, at the juncture of elevated global volatility perhaps RBI does not believe it to be opportune to cut rates. They will await more certainty from external side (US elections, Middle East tensions), before taking their first step which is not likely before March of 2025. Why disturb the horse which is well tethered?"

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