MPC changes stance to ‘neutral’, signalling a less restrictive monetary policy

• Policy rates remain unchanged: The revamped Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the repo rate unchanged during its review meeting today. However, it changed the policy stance to ‘neutral’ from ‘withdrawal of accommodation’
• What the neutral stance implies: The MPC could change the repo rate in either direction in future, depending on economic data. That way, ‘neutral’ is less restrictive than ‘withdrawal of accommodation’, which would have signalled maintaining tight monetary conditions. Progress on disinflation and a good monsoon have encouraged the MPC to change tack. That said, a ‘neutral’ stance also affords the MPC the flexibility to respond to unexpected disruptions in the disinflation process from exogenous sources
• Why the MPC stopped short of cutting rates: The RBI remains wary of supply shocks upending the durable decline in inflation. Geopolitical uncertainties and a rise in international prices of some commodities have added to the upside risks. As for food prices, unseasonal weather shocks bear watching
• The likely next move: We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, given food inflation is expected to ease after a healthy monsoon. We also expect