Why this MPC member proposed a change in monetary policy stance in October

The proposal to alter the stance was not backed by other participants during the 29 September-1 October meeting, who said that such a change could raise rate-cut expectations at a time the external environment is uncertain. In an interview to Mint, Singh said a change of stance would strengthen the transmission process — induced by the 100 basis points (bps) rate cuts so far — which, in turn, would add to the income and demand effects.

An accommodative stance would signal that the central bank supports growth and indicates that interest rates could go down, whereas a neutral stance allows the rate-setting panel to decide on a course based on fresh data.

“Yes, a change in stance to accommodative increases the odds of a rate cut in this easing cycle. At this point, signalling the likelihood of a rate cut seems a good idea," said Singh, part of the six-member rate-setting panel tasked with restricting inflation within the flexible band of 2-6%.

According to Singh, there is scope for a rate cut, which can be leveraged to sustain the growth momentum for a longer period by extending the easing cycle.

The MPC has lowered the repo rate by 100 bps since February, with an outsized and surprising 50 bps cut in June alone. One basis point equals a hundredth of a percentage point. In the October policy, members unanimously voted for a pause and the minutes of the meeting released on 15 October showed they wanted to keep the powder dry for future rate actions.

Bond yields

The MPC raised its growth forecast for FY26 to 6.8% from 6.5% earlier, while lowering the Q1 FY27 growth estimate to 6.4% from 6.6% announced in August. It also cut its FY26 inflation forecast to 2.6% from 3.1%.

“Expectations of a rate cut will likely put downward pressure on bond yields, thereby enhancing the appeal of the bond market to borrowers seeking to raise funds through market instruments," said Singh.

The yield on the 10-year sovereign paper softened 7 bps since 30 September and closed at 6.5% on Thursday, per data from Investing.com. The yields had initially hardened after the 50-bps cut in June, with the yields having already dropped after the cumulative 50 bps cut in February and April.

Mint reported on 10 October that after a muted September quarter, India’s corporate bond market is reviving, with major borrowers lining up to raise funds as yields begin to soften following dovish signals from the RBI.

The MPC did take cognisance of the potential impact of US President Donald Trump’s tariffs, although the recent changes to the indirect tax regime under the goods and services tax is expected to aid consumption, acting as a backstop.

Trump’s tariffs on the world’s fifth-largest economy are expected to hit sectors particularly exposed to exporting goods to the US. What could aid domestic consumption and lower inflation is the government’s decision to limit GST slabs to 5% and 18% and moving several categories of products to lower rates.

On external uncertainties, Singh said that tariffs and financial market-related uncertainties have persisted over the past two quarters and consequently, the forex market seems to have already priced in the worst in this regard.

Risk of overdose

“Though the exchange rate remains a concern, any pressure on the INR (Indian rupee) is likely to be short term, given the robust fundamentals of the Indian economy, including adequate forex reserves and a comfortable current account position," said Singh.

The rupee strengthened 85 paise to close at 87.99 on Thursday, per Investing.com data.

Singh had said in his MPC statement that a rate cut in October could risk an overdose, given that the effects of monetary easing and fiscal measures are still working through the system.

He told Mint that in the first two quarters of this fiscal, the economy has been pump-primed with several monetary interventions to boost demand and credit growth – a 100-bps cut in policy rate, a 100-bps cash reserve ratio cut, and substantial micro and macro prudential norms for banks and non-banking financial companies.

“Transmission of monetary easing is still underway and has been broad-based across sectors and channels (banks, NBFCs, and the bond market), but remains incomplete," he said. “Even without any further cuts, the frontloaded rate cuts riding on the remaining CRR cuts will further facilitate monetary transmission. Besides, there have been two major fiscal interventions: income tax reliefs and GST rationalisation and rate reductions."