Neutral stance gives RBI freedom for managing liquidity

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Subscribe to enjoy similar stories. The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously voted for a change in stance to neutral from withdrawal of accommodation while one member dissented on the rate action in favour of a rate cut. There is a significant change in the RBI governor’s statement from the last policy with focus increasingly shifting to balancing growth and inflation rather than being ‘actively disinflationary’.

The neutral stance gives RBI more degrees of freedom for managing liquidity and thus transmission of policy rates into broader interest rates. The change in stance is due to both global and domestic factors. Globally, across developed and emerging markets, central banks are now easing policy rates and injecting liquidity driven by changing domestic growth and inflation dynamics even as there are a few outliers (Japan, Brazil and Russia).

While commodity prices have gone up recently after stimulus announcement by China, the slower world growth is most visible in oil prices which have been moving lower due to weak demand. Even as geo-political risks have flared up, prices have not sustained above $80 per barrel. Though there were a few data prints on the domestic side that were underwhelming and point towards growth concerns, RBI has chosen to retain its growth estimate for FY25.

The Q1 growth was lower than RBI’s estimate since government spending was lower. Even Q2 growth would be impacted by above normal rainfall seen in the second half of the monsoon which has driven power demand lower. While RBI has revised H1 growth lower to 6.9% from 7.1% earlier, it has revised H2 growth higher to 7.4% from 7.3% and hence managed to retain the projection at 7.2%.