India’s central bank faces a critical decision as it navigates the delicate balance between supporting economic growth and maintaining inflation control. With the Reserve Bank of India (RBI) expected to hold its key repo rate steady at 6.5 per cent, there is growing anticipation of a potential shift in policy stance from the current focus on inflation to a more neutral approach. Such a move could open the door for rate cuts in the near future, particularly as economic indicators suggest a slowdown in growth and inflation appears to be under control.

India’s economic growth, while still robust compared to other major economies, has shown signs of cooling. The slowdown to 6.7 per cent in the April-June quarter, driven partly by reduced government spending during national elections, has raised concerns about the economy’s trajectory. High-frequency data, including manufacturing and services PMIs, also point to weakening momentum, suggesting the need for a more accommodative monetary policy. The manufacturing PMI hit an eight-month low in September, while the services sector, a key driver of growth, reached its lowest point in ten months. These indicators highlight the challenges faced by the economy and the necessity of policy adjustments to sustain growth. Inflation, traditionally a primary concern for the RBI, has been relatively tame in recent months.

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Retail inflation has remained below the central bank’s target of 4 per cent, with August marking the second consecutive month of subdued price growth. While some analysts predict inflation may tick up slightly in the coming months, the overall outlook remains manageable, with projections well within the RBI’s comfort zone. This gives the central bank room to shift its focus from inflation control to stimulating growth, which could be crucial in the months ahead as global economic conditions continue to evolve. The US Federal Reserve’s recent decision to cut rates has added to the expectation that the RBI may follow suit sooner than previously anticipated. Many market participants now predict that India’s central bank could begin cutting rates as early as December, rather than waiting until 2025 as earlier forecasts suggested. The timing of any rate cut, however, will depend on a variety of factors, including domestic inflation trends, global economic conditions, and the evolving stance of the RBI’s Monetary Policy Committee (MPC).

This week’s MPC meeting will also be watched closely for insights into how new external members may influence the direction of monetary policy. With two of the six previous members having voted in favour of rate cuts in recent meetings, the reshuffling of the panel introduces an element of unpredictability. Some analysts believe at least one member may dissent and call for an immediate rate cut, further signaling that a change in policy direction could be on the horizon. A move to neutral could pave the way for much-needed rate cuts, helping to stimulate the economy and maintain India’s position as a global growth leader in a challenging environment.