The next meeting of the Monetary Policy Committee of the Reserve Bank of India is on October 7-9, 2024. It is quite likely that the meeting will be dominated by the voices growing louder for a Repo Rate cut by the central bank. While the demand was growing louder for the past few months, the decision by the US Federal Reserve to slash key rates by 50 basis points will help step up the decibel in India.
The Indian central bank has kept the policy interest rate steady at 6.5% since May 2023. This rate was raised from 4.0% to 6.5% in a series of steps from April 2022 to tackle inflationary pressure on the economy.
RBI guv concern: food inflation
In August, RBI governor Shaktikanta Das said that food inflation stood in the way of a rate cut. The voices within MPC advocating a rate cut were rising from April this year. “We are in a catch-up growth phase. Growth has to go up in order to create employment and jobs for young people, for the investment cycle to take off, and so on,” an external member on the committee told an agency in April.
To cut or not to cut, will be flying thick and fast in the MPC next month. Incidentally, the committee will have 3 new members from the October meeting.
Rate cut could lower EMIs, raise demand
While high interest rates raise the cost of capital and thwart interest rates, a reduction in Repo Rate is likely to be passed on to the general public in the form of lower EMIs on personal loans, home loans, car loans and education loans, all of which would help raise aggregate consumption levels in different sectors of the economy, providing an upward push to growth.
Very high real interest rate – the gap between Repo Rate and retail inflation forecast for the next year – makes discourages businesses from making capital expenditures, say experts. Right now, this gap is around 2.1% in India, whereas 1.4%-1.9% is deemed conducive.
Unlikely this year, thinks SBI chief
The RBI has set its eyes on attaining a 4% retail inflation on a stable basis. Therefore, it might just wait and watch the data for a few months before wielding the axe. The chairman of SBI, C S Setty, has already told PTI that RBI is unlikely to cut rates in 2024.
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