The RBI decided to maintain interest rates but change its policy stance

Source: The post the RBI decided to maintain interest rates but change its policy stance has been created, based on the article “RBI’s shift to neutral and open doors for a trim in rates” published in “Indian Express” on 10th October is 2024 

UPSC Syllabus Topic: GS Paper 3– Economy- inflation  

Context: The article discusses the RBI’s decision to maintain interest rates but change its policy stance from “withdrawal of accommodation” to “neutral.” This shift allows for potential rate cuts, reflecting confidence in lower inflation and improving growth driven by consumption and investment. 

For detailed information on Monetary Policy Committee read this article here 

What was the decision on interest rates? 

The RBI’s monetary policy committee decided to keep interest rates unchanged. In their recent meeting, five out of six members voted to maintain the current rates. 

Why did the RBI change its policy stance? 

1. The committee changed its policy stance from “withdrawal of accommodation” to “neutral.” 
2. This change could lead to future rate cuts and aligns with decisions by other central banks like the European Central Bank and US Federal Reserve, which have also started rate cut cycles.
3. The change is attributed to increased confidence in controlling inflation, especially in food prices. 
4. Food inflation dropped from 8.6% in February to 5.66% in August, and the RBI expects prices to ease further due to a good monsoon and healthy agricultural production.

What Are the Expectations for Inflation and Growth? 

1. The RBI expects inflation to decrease further to 4.3% by the next financial year’s first quarter, staying within their target.
   2. On growth, the RBI is optimistic, projecting a 7.2% growth rate for the economy this year, which is more positive compared to other estimates like ICRA’s 7% and Crisil’s 6.8%.

What Is the Outlook on Consumption and Investment? 

1. Rural demand for goods is increasing, and urban demand remains stable. 
2. The finance ministry’s review indicated potential weakness in urban sectors like automobiles and fast-moving consumer goods.
3. Despite this, the RBI notes that government capital spending is recovering, and private investment is strengthening, indicating positive momentum in the economy’s growth drivers.

Question for practice: 

Examine why the RBI shifted its policy stance from “withdrawal of accommodation” to “neutral” and how this change reflects the central bank’s confidence in inflation and growth.