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RBI maintains Repo Rate at 6.5%, shifts policy stance to “Neutral” amid inflation concerns

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In a move broadly in line with market expectations, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced its decision to maintain the repo rate at 6.5% during its October 9 meeting. However, the central bank shifted its policy stance from “withdrawal of accommodation” to “neutral,” indicating a more flexible approach moving forward. This change comes as the RBI continues to express concern over inflationary pressures, particularly in light of rising fuel prices and unfavorable base effects.

Despite retaining its GDP growth and inflation estimates for FY25, the RBI highlighted the risks of sticky inflation. Governor Shaktikanta Das emphasized that while inflation has shown signs of moderation in recent months, the central bank remains cautious. “The inflation horse has been brought to the stable within the tolerance band. However, we must be careful about opening the gate,” said Das, indicating that inflation could still pose challenges in the near term.

The RBI expects the Consumer Price Index (CPI) for September to rise due to unfavorable base effects and a spike in fuel prices. While the overall inflation projection for FY25 remains unchanged at 4.5%, the RBI revised its quarterly estimates. The central bank cut the Q2FY25 CPI forecast to 4.1% from 4.4%, raised Q3 estimates to 4.8%, and made slight downward revisions for Q4FY25 and Q1FY26.

The RBI maintained its GDP growth projection for FY25 at 7.2%, signaling continued optimism about the Indian economy’s resilience. However, the central bank trimmed its Q2FY25 growth forecast to 7%, citing potential headwinds. It offset this by raising the growth outlook for the latter half of the fiscal year and Q1FY26, with projections of 7.4% for Q3 and Q4FY25 and 7.3% for Q1FY26.

While these adjustments suggest a mixed outlook, the overall trajectory remains positive, reflecting the central bank’s confidence in the economy’s ability to withstand inflationary pressures and external shocks. The shift to a “neutral” policy stance, agreed upon by all six MPC members, provides the RBI with greater flexibility to respond to evolving economic conditions. However, the lack of downward revision in growth and inflation estimates suggests that any immediate move towards rate cuts remains unlikely.

The RBI’s decision to maintain the repo rate at 6.5% stands in contrast to the US Federal Reserve’s recent rate cuts. In September, the Fed slashed rates by 50 basis points, with further reductions expected in November and December. Despite these global trends, the RBI has chosen to prioritize domestic economic stability and inflation control over following the US lead in monetary easing.
In addition to its monetary policy decisions, the RBI announced several initiatives aimed at enhancing financial inclusion. The central bank proposed raising the per-transaction limit for UPI 1 2 3 Pay from ₹5,000 to ₹10,000 and increasing the UPI Lite wallet limit from ₹2,000 to ₹5,000. The per-transaction limit for UPI Lite was also raised from ₹100 to ₹500, further promoting the use of digital payment systems.

Governor Das also addressed concerns about potential stress buildup in the unsecured lending segment, particularly in loans for consumption purposes, microfinance, and credit cards. The RBI is closely monitoring these sectors and emphasized the need for banks and NBFCs to maintain robust underwriting standards and monitoring practices.

The RBI’s decision to hold repo rates steady while shifting to a “neutral” stance reflects a delicate balancing act between controlling inflation and supporting economic growth. With inflation risks still on the horizon and global uncertainties persisting, the central bank has kept its options open, signaling that it will remain vigilant and responsive to changing conditions. For businesses and consumers, this means continued stability in borrowing costs for now, but with a cautious eye on potential inflationary pressures.

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