RBI to Shift Monetary Stance to Neutral
The Reserve Bank of India (RBI) is expected to change its monetary policy stance to ‘neutral’ from the current ‘withdrawal of accommodation’ this month, with potential rate cuts starting in December, according to a report by Nuvama. The Monetary Policy Committee (MPC) is likely to keep the repo rate at 6.5% in its upcoming meeting.
Reasons for the Shift
The report highlights several factors prompting this change, including a slowdown in economic activity, low core inflation, and fiscal tightening. The first quarter GDP growth for the financial year 2025 was 6.7%, below the RBI’s projection of 7%, indicating weak economic activities. Indicators like vehicle sales, cement volumes, fuel consumption, GST collections, and rural wages have shown sluggishness, along with subdued government spending and exports.
Influence of Global Factors
The U.S. Federal Reserve’s recent easing of rates is also expected to influence the RBI’s decision. The report suggests that domestic demand is slowing amid weak exports, and fiscal policy is tightening while core inflation is near record lows. This evolving growth-inflation mix suggests that a tight monetary stance may not be necessary.
Future Economic Outlook
The report indicates that the economy might be returning to pre-pandemic levels of weak demand, with capital expenditure-to-GDP ratios stabilizing. Although headline inflation is above target, core inflation has been declining over the past 16 months, reflecting weak pricing power and muted growth in consumption-driven sectors. The RBI’s fiscal policy is contractionary, with tax revenue growth slowing, potentially affecting government capital expenditure in the future.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India. It is the central bank of India, responsible for managing the country’s money supply and interest rates.
Monetary Stance -: Monetary stance refers to the approach or policy the central bank takes to control the money supply and interest rates in the economy. It can be ‘neutral’, ‘accommodative’, or ‘restrictive’.
Neutral -: In monetary policy, ‘neutral’ means the central bank is neither trying to stimulate the economy nor slow it down. It is a balanced approach.
Rate Cuts -: Rate cuts refer to the reduction of interest rates by the central bank. Lower interest rates can make borrowing cheaper, encouraging spending and investment.
Withdrawal of Accommodation -: This means the central bank is moving away from policies that make borrowing easy and cheap, usually to control inflation.
Core Inflation -: Core inflation measures the long-term trend in prices by excluding items that can be very volatile, like food and fuel.
Fiscal Tightening -: Fiscal tightening means the government is reducing its spending or increasing taxes to control its budget and reduce debt.
GDP Growth -: GDP growth is the increase in the value of all goods and services produced in a country. It shows how fast the economy is growing.
U.S. Federal Reserve -: The U.S. Federal Reserve is the central bank of the United States, similar to the RBI in India. It manages the U.S. money supply and interest rates.
Pre-pandemic Levels -: Pre-pandemic levels refer to the state of the economy before the COVID-19 pandemic, when demand and economic activities were normal.
