On October 9th, the Reserve Bank of India (RBI) decided to keep the key interest rate unchanged at 6.5%, in line with market expectations.

Officials stated that during the Monetary Policy Committee (MPC) meeting held on Wednesday, the newly constituted committee voted five to one to maintain the benchmark repo rate at 6.5%. Among the committee members, the newly added external member, Nagesh Kumar, voted in favor of reducing the interest rate.

More notably, the RBI adjusted its policy stance to "neutral" during this meeting, hinting at the possibility of lowering interest rates in the near future.

Generally speaking, adopting a "neutral" stance means that the central bank is open to future adjustments in interest rates, neither leaning towards further tightening nor favoring immediate monetary easing. Analysts suggest that this stance may be based on the RBI's assessment of the current economic conditions, including inflation rates, economic growth, the job market, and the international economic environment.

RBI Governor Shaktikanta Das indicated that food costs, which account for half of the overall inflation, may decrease in the coming months, thereby improving the inflation outlook. However, he stated that the central bank does not wish to relinquish the hard-won gains in controlling inflation, and policymakers must remain vigilant.

In recent policy briefings, Das reaffirmed his commitment to achieving a 4% inflation target, reflecting his firm vigilance on price stability. Today, Das once again warned against complacency, vividly stating in a televised speech: "After much effort, this horse of inflation has been brought back to the stable. We must be very careful about opening the gate, as this horse might bolt again."

Spurred by the news, Indian bonds and stocks rose in unison. Indian bonds saw their largest increase since February, with the 10-year bond yield falling by 5 basis points to 6.75%. The Indian Rupee's exchange rate remained largely unchanged, while stocks expanded their gains.

Regarding this rate decision, RBI Deputy Governor Michael Patra said that the RBI's immediate priority is to tackle near-term challenges, often referred to as the "near-term hump." The issues that the RBI is currently eager to address include the impact of adverse weather events and the escalation of geopolitical conflicts, which could disrupt agricultural production and affect food prices, a significant component of the consumer price index.

The RBI stated that, considering the significant risks we face, it is premature for the central bank to discuss a specific timeline for rate cuts.

Economists generally believe that before officially starting to cut rates, the central bank will closely monitor the impact of geopolitical uncertainties and inflation readings in the coming months.

Economist Dilip Nimkar from Australia & New Zealand Banking Corp believes, "The bar for rate cuts remains high and depends on whether food inflation subsides. Our expectation is that if food prices do not face any shocks, the RBI will cut rates in December."

Overall, the global trend of rate cuts is unstoppable. From the United States to the United Kingdom, inflation is slowing down in various countries, allowing central banks worldwide to readjust their monetary policies and begin cutting rates. Last month, the Federal Reserve unexpectedly cut rates by 50 basis points and may cut rates by another 25 basis points in November.

In terms of policy objectives, the RBI has maintained its economic growth and inflation expectations for the fiscal year ending in March 2025 at 7.2% and 4.5%, respectively. Das stated that the economic growth outlook remains unchanged, with private consumption and investment growing in tandem.

It is understood that the last time the RBI adjusted interest rates was in February 2023, when the policy rate was raised to 6.50%. Recently, signs of economic weakness have emerged in India, with the annual retail inflation rate in August at 3.65%, below the central bank's 4% target for the second consecutive month. High-frequency indicators such as the Purchasing Managers' Index for manufacturing slowed to an 8-month low in September, while the services PMI fell to a 10-month low. India's overall economic growth slowed to 6.7% in June.