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The Reserve Bank of India (RBI) kept its key interest rate unchanged on Wednesday but took the first step towards a rate cut as it eased its relatively hawkish policy stance to 'neutral'.
The monetary policy committee, which included three RBI officials and an equal number of new external members, voted five-to-one to keep the benchmark repurchase or repo rate - which governs the interest rate of home, auto, corporate and other loans - at 6.5 per cent for a 10th straight policy meeting.
The panel, however, unanimously decided to change the policy stance to 'neutral' - the first since June 2019 - from 'withdrawal of accommodation' amid signs of a slowing economy.
Interest rates were last changed in February 2023 when they were hiked to 6.5 per cent from 6.25 per cent.
RBI Governor Shaktikanta Das said the committee changed the stance but will remain unambiguously focused on the durable alignment of inflation to target while supporting growth.
Food inflation, he said, may ease in coming months, while the core inflation, which excludes the volatile food and energy costs, appears to have bottomed out.
India's economic growth outlook remained intact, with private consumption and investment growing in tandem.
The change of stance signals a possible move to cut interest rates in forthcoming MPC meetings, the next being due in early December.
RBI will join other central banks in a policy pivot that was led by the US Federal Reserve easing rates last month.
Annual retail inflation eased below the central bank's target of 4 per cent for a second consecutive month in September and will, as per RBI expectation, rebound again this month, largely due to base effects.
RBI kept its inflation forecast unchanged at 4.5 per cent for the 2024-25 (April 2024 to March 2025) fiscal year.
It also kept its GDP forecast unchanged at 7.2 per cent.
Das said the prevailing and expected inflation-growth balance has created conditions for a shift in the monetary policy stance as there now is greater confidence on the last mile of disinflation.
RBI also highlighted concerns about the geo-political risks and the weather-related shocks along with its adverse impact on commodity prices particularly crude oil where India's import dependence is very high.
"Inflation is on a declining path, although we still have a distance to cover," Das said unveiling the policy in a televised address.
"We are, however, not complacent, especially amidst rapidly evolving global conditions."
The monetary policy action of Wednesday reflects the MPC's assessment that, at the current juncture, it would be appropriate to have greater flexibility and optionality to act in sync with the evolving conditions and the outlook.
"We stand unambiguously committed to ensure durable alignment of inflation with the target, while supporting growth."
Suman Chowdhury, chief economist and executive director, Acuité Ratings & Research, said while the MPC has not provided any clear guidance on the rate cuts, it is likely that it will go for a rate cut in December this year or February 2025, provided the inflationary environment is stable and the headline inflation is consistently within 4.5 per cent in the next few months.
Aditi Nayar, Chief Economist and head of Research and Outreach, ICRA Ltd, said MPC review prudently prioritised flexibility, by changing the stance.
"This has opened the door for a potential rate cut in December 2024, if the lurking risks to inflation, both domestic and global, do not materialise.
“In our view, the Indian rate cut cycle will be fairly shallow, restricted to 50 basis points over two policy reviews."
The RBI Governor sounded a warning to the NBFC sector.
Aggressive growth in some asset classes among NBFCs and specifically in the microfinance sector can pose risks for financial stability going forward, he warned.
RBI is also closely monitoring likelihood of stress buildup in a few unsecured loan segments like loans for consumption purposes, microfinance loans and credit card outstandings, Das said adding the central bank may take measures as may be considered necessary.
"Banks and NBFCs, on their part, need to carefully assess their individual exposures in these areas, both in terms of size and quality.
“Their underwriting standards and post-sanction monitoring have to be robust," he said, calling for continued attention to potential risks from inoperative deposit accounts, cybersecurity landscape and mule accounts.
Among measures announced Wednesday included doubling of the pre-transaction limit in UPI123Pay (feature phone) to Rs 10,000 and an increase in the UPI Lite wallet limit to Rs 5,000 from Rs 2,000 and a doubling of per transaction limit to Rs 1,000.