Interest Rate Decisions of the Reserve Bank of India in Focus: A Turning Point for the Economy?

The Reserve Bank of India (RBI) is facing a potentially decisive meeting where it is expected to keep the key interest rate unchanged at 6.5%. This would be the tenth consecutive meeting without an adjustment. According to a Reuters survey, over 80% of the economists surveyed expect no change in the interest rate. The repo rate has remained constant since February 2023, although a small portion of experts, including a dozen economists, anticipate a possible 25 basis point cut. Nomura economists see a 55% chance for a rate cut in October, albeit narrowly. Influencing factors such as the recent 50 basis point rate cut by the U.S. Federal Reserve could prompt the RBI to reconsider its strategy and potentially begin rate cuts earlier than planned. The majority anticipate the first adjustments in December, instead of the previously assumed spring of 2025. The recession of the U.S. dollar and the persistently low inflation offer further potential for a change in direction by the Indian central bank. India recorded economic growth of 6.7% in the first quarter, remaining the fastest-growing large economy. However, a decline in government spending during the national elections impacted growth, while significant indicators like the manufacturing purchasing managers' index fell to an eight-month low in September. The services sector also showed weakness, dropping to a ten-month low. Inflation was at 3.65% in August, below the central bank's target of 4% and slightly above expectations. Forecasts suggest that inflation could rise to an average of 4.5% in the current fiscal year, with 4.3% expected for the next year. Bank of America estimates that the RBI could have room for a 100 basis point rate cut by December 2025, starting in December 2024. With the reconstitution of the RBI's monetary policy committee every four years, a change in voting patterns could occur. Two of the departing six members recently met to discuss rate cuts. Economists from Yes Bank emphasize the importance of the role of these new members, as tensions over India's economic slowdown and limited inflation risk increase.