📰What India's Central Bank Decided

Hello. Just after midnight (New York time), India’s monetary policy committee met to hold rates steady and adopt a neutral stance. We’ll investigate what this means for India’s economy, and then close with Gupshup, a round-up of the most important headlines.

Ratan Tata, chairman emeritus of Tata Group, passed away just hours ago. He was 86. Tata ran the conglomerate for 20 years starting 1991 and focused especially on its global expansion. Samosa Capital mourns the loss of India’s industrial titan.

BTW: India’s home to the world’s largest family. Just how big is it? (Answer at bottom)

Markets

Read here for an appendix on the above.

Analysis

RBI Delays Rate Cut, But Lays Groundwork for Easing

Shortly after midnight (New York time), the Reserve Bank of India decided to hold rates steady at a restrictive 6.50 percent for the 10th meeting in a row. The RBI has not cut rates for four years. RBI Governor Shaktikanta Das underscored that inflation remains a pressing concern, driven by food price fluctuations and geopolitical uncertainties. The MPC, made of 3 appointed and 3 external members, reaffirmed this decision with a 5-1 vote but unanimously turned rhetoric more dovish. 

However, the central bank hinted at a potential shift by changing its stance from “withdrawal of accommodation” to "neutral,” paving the way for possible rate cuts in the coming months if inflation eases, starting as early as December. 

A “withdrawal of accommodation” stance refers to a restrictive monetary policy, where it will not prioritize accommodating or emphasizing economic growth, instead reducing monetary supply and keeping higher rates to keep prices under control. A shift to neutral means the central bank will explore monetarily expansive policies; these stances reflect the RBI’s forward-looking policy approach.

Rates and Inflation

The RBI's decision to hold rates at 6.50 percent was expected, but key challenges remain for India’s economy. Inflation, driven by rising food and fluctuating global energy prices, remains high. Food inflation was 5.22 percent in August, contributing half of the 3.54 percent retail inflation. While this seems like an improvement from over 7 percent in June, base effects account for most of it. Stagnant or rising 2023 prices make 2024 look better in comparison. Energy prices, especially Brent crude's 7 percent surge due to Middle East tensions, also influenced the RBI's decision. 

Other Updates

• The repo rate (banks lending to to other banks) is at 6.50 percent, the SDF (reverse repo - the RBI borrowing from other banks) is at 6.25 percent, and the MSF/Bank rate (discount rate) is at 6.75 percent effectively setting financial lending at a 50 bps band of 6.25 to 6.75 percent. 

• FY25 GDP growth is expected to be at 7.2 percent with Q2 being 7 percent and Q3 and 4 being 7.4 percent; Q2 was revised down but Q3 and 4 were revised up

• FY25 CPI is expected to be 4.5 percent with Q2 falling to 4.1 percent before Q3 goes to 4.8 percent and Q4 comes down to 4.2 percent. The volatility is expected to be due to base effects taking hold before wearing off

Read also: The RBI overweights food in its consumer index, giving it less flexibility to manage inflation and economic growth.

Read also: How the Monetary Policy Committee works, and why India’s central bank is not the chief authority on setting rates.

Macro

• RBI quarterly survey finds inflation expectations easing. The survey, which took place between September 1-10 with 6,000 respondents in 19 major cities, shows households expecting inflation to reduce by 10 basis points now, and 20 basis points over the next three months. (BBG)

• RBI warns shadow banks to increase creditworthiness checks of loans or fear regulatory action. Governor Das agrees most banks are safe, and that there are some “outliers” that put larger financial systems at risk. Shadow banks, which are non-banking finance companies offering credit lines and loans, have exploded in growth over the last few years. (BBG)

• Indian families are pouring life savings into IPOs, causing concern for regulators. Monthly contributions to Indian mutual funds are at a record high — liquidity has little place to go other new shares in the booming stock market, while India is home to the most IPOs globally. Indian IPOs experience massive pops: IPO shares rise 39 percent on their first trading day, and 42 percent in their first month.

Equities

• Byju’s, an Indian education start-up, denies it tried to transfer $533 million (₹44.8 billion) away from U.S. lenders. Three years ago, the company received a $1.2 billion (₹100.8 billion) loan for international expansion, of which some funds were moved to offshore accounts linked to founder Byju Raveendran; lenders have been trying to track the money down for a year. Last month (Sept 2024), Byju’s defaulted on $1.5 billion (₹125.9 billion) in U.S. debt. The company, once valued at $22 billion (₹1.8 trillion), has fallen to a $200 million (₹16.8 billion) valuation. (BBG)

• Jindal Steel and Power, India's third-largest private steel producer, is backing out of a deal to operate an oil-processing facility for Venezuela's state-owned crude producer. The $300 million (₹25.2 billion) deal would have been Jinda’s first time entering the oil business, but the deal ultimately collapsed over disagreements on control of the operation. (BBG)

• Hyundai plans to invest $3.8 billion (₹319 billion) in more plants in India over the next 10 years. The company will have 1.1 million annual car production from India to boost international and rural Indian sales. (Livemint) 

• Indian funds vacuumed $1 billion (₹84 billion) of equities per day for a three-day period ending Tuesday (October 8). Portfolio managers smartly took advantage of suppressed valuations after international investors rotated money out of India and into China. (BBG)

• Ola Electric’s post-IPO hype flattens with a 9.6 percent drop to its lowest share price since its public offering. Falling valuations come after customers voiced viral complaints against the company’s electric scooters. Ola’s market share has fallen to a 16-month low of 27 percent. (BBG)

Alts

• FTSE Russell will add India to its emerging market government bond index in September 2025. Indian bonds will make up 9.35 percent of the index by market value, becoming the second-largest component after China. It will be the third index including Indian debt after JPMorgan and Bloomberg Index Services. (Business Standard)

Policy

• An unexpected win in state elections in Haryana, a small northern agrarian state, for Narendra Modi’s BJP, solidifies his upward momentum. The BJP was expected to be weakened after tear-gas shells were used to squash pro-farmer protests and youth unemployment remains high. (Al Jazeera)

Oh, and the largest family in the world lives in Mizoram, India. Ziona Chana, the head of the family, had 39 wives, 94 children, and over 30 grandchildren, all living together in a 100-room mansion. Chana passed away in 2021.

See you next week.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

1 USD = 83.96 Indian Rupee