RBI begins three-day monetary policy meeting, is rate cut on cards?

RBI MPC: The Reserve Bank of India started its three-day monetary policy meeting on October 7. The question here is whether the RBI will maintain the repo rate at 6.50 per cent or opt for a rate cut, just as the US Fed did by cutting the rates by 50 bps in September. It will be the ninth consecutive meeting where the repo rate has remained unchanged. The motive is that RBI aims at both simultaneously inflation and the economy.

It occurs in the wake of the latest policy action by the US Federal Reserve when it slashes interest rates by 50 basis points in a prolonged stability scenario.

Key Drivers of the RBI 's Decision

The monetary policy committee, headed by RBI Governor Shaktikanta Das, is likely to pay attention to quite a few things while taking the decision. Some of them would include the trend of inflationary in the economy, the global economic uncertainties prevailing at present, and then prospects related to growth in the domestic economy. Indeed, inflation remains a challenge, more particularly with respect to food and fuel prices, which have risen significantly in early this year.

According to the Ministry of Statistics & Programme Implementation, all-India consumer price inflation stood at 3.65 per cent in August and was therefore within the RBI 's target band; food inflation went up to 5.65 per cent, which is above the RBI's medium-term target of 4 percent.

Geopolitical Tensions and Economic Resilience

External factors, such as the global crude price going up, also would have strengthened by tensions in West Asia, may also force RBI to act. "The RBI is likely to remain status quo at the next MPC meet. The basic effect of inflation has to be tolerated to have clearer views. Tensions in the Middle East are adding to the inflationary triggers that come with higher crude prices. Shishir Baijal, Chairman and Managing Director of Knight Frank India.

Even as rates may be at a different level altogether, the Indian economy has still been resilient, especially the consumption indicators, even in the otherwise battered real estate sector. "Such sustained growth will offer enough cushioning for the RBI to keep the repo rate at the existing level of 6.5 percent," said Baijal. Credit and deposit growth are already on unequal footing with the former outpacing the latter, which might force the RBI to keep policy rates tight for a rather longer period.

Industry Views On Future Rate Cuts

Amit Jain, Managing Director, Arkade Developers felt on the contrary saying rate cut is imminent in near time. "Repo rate stability since February 2023 has helped real estate benefit from constant borrowing and lending rates, including home loans." The modest headroom along with inflationary pressures may, however, necessitate a 25 to 30 basis points rate cut in October. This easing will further spur borrowings and home sales, especially during the festival season which is crucial for the market.

Therefore, festival season is critical for sales to happen, says Jain. "Rate cuts will boost demand in all markets, especially in Mumbai which saw one lakh home sales in a record nine months," he says. As the RBI 's monetary policy meeting unravels, the decisions taken there will shape the economic and political landscape of India in the coming months.

"Given the severely constrained headroom and mounting inflationary pressures, we are looking forward to a 25 bps to 30 bps rate cut in October. This rate cut shall increase borrowing, and boost home sales further, especially during the Q3FY24-25 festive seasons. As the festive season is just around the corner, it is one of the most important times for home sales. Rate reductions shall boost demand in all markets but especially in Mumbai, which recently crossed the one lakh home sales milestone in a record 9-month time," said Amit Jain, MD, Arkade Developers.