RBI meeting: RBI maintains status quo on repo rate but changes stance to ‚Neutral‘; what does it mean for the markets? Experts decode<\/b>
\nThe Reserve Bank of India’s (RBI) today, October 9, in its policy decision kept the repo rate unchanged at 6.5 per cent but changed its stance to ‚Neutral‘ from ‚Accommodative‘ which is largely assumed as a signal for rate cuts soon. As per thr RBI Governor Shaktikanta Das, the growth-inflation matrix is well balanced and conditions are favourable for attaining the goal of durable low inflation in the near future.
\tFurthermore, the RBI Monetary Policy Committee (MPC) maintained a status quo on its inflation target for FY25 is at 7.2 per cent and 4.5 per cent respectively. Das highlighted adverse weather conditions, ongoing geopolitical conflicts, and a rise in select commodities as the key threats to its inflation forecast.
\tMeanwhile, the MPC has cut its Consumer Price Index (CPI) inflation forecast for the first quarter of fiscal year 2025-26 (Q1FY26) to 4.3 per cent from 4.4 earlier.
\tMarket participants are largely anticipating a rate cut soon after RBI’s change in stance. Experts expect banking stocks to benefit from the rate cut going ahead and bond yields to ease.
\tThis ’neutral‘ stance is not a precursor to rate cuts but a strategic recalibration which is ‚a calculated wait-and-see approach‘, allowing the central bank to act swiftly if inflationary or growth dynamics shift sharply. Future cuts will likely be shallow (50-75 bps in FY25, starting from the Dec’24 meeting if growth indicators continue to show weakness), reinforcing that every policy decision remains \u2018live\u2019 and meticulously data-driven. The RBI\u2019s stance is a clear signal: stability over stimulus, ensuring inflation is durably anchored before committing to a looser policy.
\tThe MPC’s decision to keep rates unchanged aligned with our outlook and expectations. There is no immediate risk to growth, which is positive for the equity markets. While geopolitical tensions could affect inflation through commodity price fluctuations, overall liquidity remains stable, the shift from an accommodative stance to ‚Neutral‘ opens up the chances of rate cut in the next MPC meeting in December. This outlook is favourable for equity markets, the next policy meeting will be crucial, with a strong possibility of rate cuts that may bring big changes.
\tThe decision to keep the repo rate unchanged is a prudent move, aimed at stabilising inflationary pressures and supporting economic stability. With one uncertainty out of the way, the market participants will now start focusing on earnings season. We continue to have a bullish stance on the markets and expect the markets to reach the previous highs going forward.
\tThe RBI Governor exuded optimism about the Indian macros when he said, \u201cThe Indian economy presents a picture of stability and strength.\u201d The Governor\u2019s comment that \u201cthe inflation horse has been brought back to the stable\u201d reflects the MPC\u2019s confidence in reining in inflation. This confidence has enabled the MPC to change its stance to ‚Neutral‘ which may result in a rate cut by 25 bps in December. This is positive for the equity markets, particularly for the banking stocks.
\tThe RBI has maintained its growth and inflation estimates with minor tweaks. We believe a potential rate cut could be expected in Feb ’25. Given the increasing anticipation of a rate cut in the upcoming meetings, margin pressures could act as a dampener for the bank\u2019s return on assets (RoAs).
\tThe neutral stance provides flexibility for banks, supporting lending activities without an immediate need for rate hikes or cuts. This should help maintain healthy credit flows to businesses and individuals, which is vital for sustaining the economic momentum. The unchanged rates are likely to sustain consumer demand, particularly in sectors like housing, which is crucial during the ongoing festive season.
\tThe RBI has tried to maintain a balanced tone, which means it’s not a given that we see a rate cut in December policy \u2013 looks like it will be more data dependent. With inflation well within RBI’s contours, and growth fumbling a tad, the outlook on rates remains constructive. We expect bond yields to ease in the coming months and would continue to urge investors to enhance fixed income duration.<\/p>\n