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Dr Nagesh Kumar, one of the three new MPC members, wanted the MPC to reduce the repo rate by 25 basis points to 6.25%.
Contrary to the earlier expectations, the Reserve Bank of India's six member Monetary Policy Committee's decision to retain the repo rate at 6.50% was not unanimous.
In a 5:1 vote, the recently reconstituted MPC decided to hold on to the repo rate (the rate at which RBI lends to the banks) at 6.50 per cent.
The sole contra vote was by one of the three new MPC members, Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi.
Dr Kumar wanted the MPC to reduce the repo rate by 25 basis points (bps) to 6.25%.
However the MPC was unanimous in its decision for a change in stance from 'withdrawal of accommodation' to 'neutral' and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.
The central government appointed three new members to the MPC: Professor Ram Singh, Director, Delhi School of Economics, University of Delhi; Economist Saugata Bhattacharya; Dr Nagesh Kumar, Director and Chief Executive, Institute for Studies in Industrial Development, New Delhi.
They replaced Dr Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, Delhi; Dr Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai. Professor Jayanth R Varma, Professor, Indian Institute of Management, Ahmedabad.
The six member MPC is headed by RBI Governor Das; two other members are RBI officials.
At the last MPC meeting in August, Professor Varma and Dr Goyal had voted against retaining the policy rate at 6.50% and wanted the rate to be reduced by 25 basis points or to 6.25% and change the stance to 'neutral'.
According to the RBI, at the MPC meeting held between Monday, October 7 and Wednesday, October 9, Saugata Bhattacharya, Professor Ram Singh, RBI Executive Director Dr Rajiv Ranjan, RBI Deputy Governor Dr Michael Debabrata Patra and Governor Das voted to keep the policy repo rate unchanged at 6.50 per cent.
Reacting to the MPC's decision, Rajani Sinha, Chief Economist, CARE Ratings said: "With the change in stance, the MPC has given itself the flexibility to cut rates going forward, depending on how the domestic and global conditions pan out for CPI inflation."
According to Sinha, there are chances of a shallow rate cut of 25 bps in the December policy, followed by another 25 bps in the March policy, provided food inflation moderates.
"While the central bank remains optimistic on growth, some moderation in recent high frequency economic indicators like core sector, PMI Manufacturing, GST collections, passenger car sales also give reason for the RBI to look at rate cuts going forward," Sinha added.
Pointing out that the risk inflation has not fully abated and rising crude oil prices due to te likelihood of an Iran-Israel war, Dhiraj Relli, MD & CEO, HDFC Securities said: "The risks specifically concerning food inflation continue to linger and harvesting of kharif crops could alleviate them to an extent. Although economic growth has been healthy, there are some early signs of softness. Hence, the RBI would want to retain flexibility to be able to cut rates if needed and therefore a change in stance."
"The latest set of growth and inflation projections from the RBI suggest they are confident that growth will sustain," said Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers.
"Combined with the increase in the Q3 FY24 inflation projection, this implies they are willing to maintain the current stance and may wait to see further inflation reductions later in the fiscal year," Hajra remarked.
"We believe that if macro indicators continue to remain weak through October-December 2024, the probability of a rate cut in December 2024 will increase. However, if growth picks up -- now that the monsoon season is over and government spending resumes -- the central bank may wait until February 2025 before cutting rates," Hajra added.
Dharmakirti Joshi, Chief Economist, CRISIL, said the change in stance to 'neutral' while signaling circumspection, also underscores the likelihood of a rate cut in December.
"It is obvious that high food inflation is constraining Mint Road. To be sure, non-food inflation stayed significantly below trend at 2.3% in the first five months of the current fiscal," Joshi said.
Joshi anticipates a 25-basis-point reduction in the repo rate during the MPC's policy review meeting in December, in response to the expectation that food inflation will decline.
"We also expect GDP growth to moderate to 6.8% this fiscal compared with 7.2% forecasted by RBI for this year," Joshi said.
Venkatachari Jagannathan can be reached at venkatacharijagannathan@gmail.com