Mumbai: Amid downward trend in retail inflation and staying in its target range, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 6.50%.
Consequently, the standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
Repo rate refers to the interest rate at which the RBI lends to commercial banks. A high repo rate means cost of borrowing for commercial banks going up and as a result leads to rise in loan EMIs.
The six-member rate-setting panel led by RBI Governor Shaktikanta Das took the decision on repo rate unanimously based on the prevailing economic situation and outlook.
“The MPC also decided by a majority of 5 out of 6 members to remain focussed on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth,” said RBI Governor Das.
After raising the repo rate cumulatively by 250 basis points (one basis point is equal to 0.01%) to 6.5% between May 2022 and February this year to tame rising inflation, the MPC had hit the pause button on the benchmark lending rate in April.
Showing signs of moderation, the Consumer price index (CPI) based inflation came in at an 18 month low of 4.7% in April, 2023. It is currently in the RBI’s target range of 2-6%.
The MPC is tasked to keep inflation in check and maintain price stability.
Commenting on the MPC decision, Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities said that RBI staying on a pause and maintaining its stance was in line with expectations.
“The RBI remains cautious on the inflation trajectory especially as inflation will remain above the 4% target for the foreseeable future,” he said.
It may be noted that the consistent increase in the policy rep rate has not translated into lower credit offtake which continues to grow at a robust pace driven by steady demand.
Aditi Gupta, Economist at Bank of Baroda, in a report last week said that overall credit demand in the economy would remain robust at 12-14% in FY24 following a growth of 15% in FY23.
“The moderation can be attributed to a high base as well as a slowdown in GDP growth from 7.2% in FY23 to 6-6.5% in FY24,” she said.
Beating market expectations, the Indian economy grew at a healthy 7.2% in FY23 with a major push coming from the January-March quarter (Q4) when the GDP accelerated to 6.1% year-on-year.
In his monetary policy statement today, the RBI retained the real GDP estimate for FY24 at 6.5% with Q1:2023-24 growth at 8%; Q2 at 6.5%; Q3 at 6%; and Q4 at 5.7% with risks evenly balanced.
Das said that going forward with the recent rabi harvest remaining largely immune to the adverse weather events, the near-term inflation outlook looks more favourable than at the time of the April MPC meeting.
He, however, said that uncertainties remain on the spatial and temporal distribution of monsoon and on the interplay between El Nino and the Indian Ocean Dipole (IOD).
“Geopolitical tensions; uncertainties around the monsoon and international commodity prices, especially sugar, rice and crude oil; and volatility in global financial markets pose upside risks to inflation,” he said.
Taking into account these factors and assuming a normal monsoon, the RBI has projected CPI inflation at 5.1% for 2023-24, with Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%.
Referring to global headwinds and prevailing economic situation in advanced economies, Das noted that RBI has continued to focus on preserving price and financial stability, while ensuring adequate flow of financial resources to all productive sectors of the economy.
“As a result, domestic macroeconomic fundamentals are strengthening – economic activity is exhibiting resilience; inflation has moderated; the current account deficit has narrowed; and foreign exchange reserves are comfortable. Fiscal consolidation is also ongoing,” he said.
The Governor further added that the Indian banking system remains stable and resilient, credit growth is robust and domestic financial markets have evolved in an orderly manner.
UNI
