RBI Monetary Policy: MPC Takes Hawkish Pause, Repo Rate Steady At 6.5% Ahead Of Interim Union Budget

The Reserve Bank of India (RBI) has decided to hold key rates for the fifth time in a row while maintaining its 'withdrawal of accommodation' stance on Friday. This is despite inflation staying well below RBI's upper tolerance limit for two consecutive months, and GDP growth surpassing its quarterly estimates for the second month straight.

That being said, the policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. While the standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75% each.

MPC's stance of withdrawal of accommodation is to ensure that inflation progressively aligns with the target while supporting growth.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

RBI's latest decision is in line with GoodReturns poll of 40 economists which was conducted between November 15th to December 1st.

After the RBI policy outcomes, Dr. Manoranjan Sharma, Chief Economist at Infomerics Ratings said, "As repeatedly stressed by us both in the print and electronic media, e.g., on October 10, October 11, December 5, December 6 and 7, 2023, the RBI kept the benchmark Policy rates unchanged and also retained the stance of the Policy as "the withdrawal of accommodation" on the basis of a comprehensive assessment of the global and domestic environment. This Policy is entirely in conformity with our pre-policy expectations."

Sharma added, "In view of the evolving growth-inflation trade-off, the MPC took the right call in holding the rates steady."

Apart from this, RBI raised its GDP growth forecast to 7% from 6.5% for the current financial year. In the fourth quarter of FY24, RBI forecasted GDP growth at 6%, which is higher than its earlier estimates of 5.7%.

On the contrary, RBI kept the CPI inflation target unchanged at 5.4% for FY24.

The majority of experts have predicted a status quo, with little signs of dovish remarks. However, many also expected RBI to tone down its hawkish remarks. Experts believe rate cuts between 25-100 bps after Q2 of FY25.

RBI has kept rates unchanged since the start of FY24 to observe the rate hike impacts on the economy and businesses. After Russia invaded Ukraine in early 2022, RBI including other central banks went for aggressive hiking in interest rates to tame extreme inflation pressure. From May 2022 to February 2023, RBI has hiked the repo rate by 250 bps.

As per the latest data, India's consumer price index (CPI) inflation dropped to its lowest in four months 4.87% in October 2023 owing to a decline in various product categories. The country's real GDP growth comes to around 7.6% in the second quarter of FY24, stronger than the street's estimates of 6.8%. The latest economic print also surpassed RBI's Q2 target of 6.5% for the second consecutive quarter.

The next CPI inflation data will be released on December 12th, which will be taken into consideration in the upcoming policy in February 2023.

The rate decision was taken by a six-member panel of the monetary policy committee (MPC) chaired by the RBI governor. These include, Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shaktikanta Das.

This RBI policy is also ahead of interim Union Budget for the financial year 2024-25 which will be presented by Finance Minister Nirmala Sitharaman on February 1, 2024. This would be interim because of general election which is expected to take place between April to May 2024. Usually, during an election year, the current government presents an interim budget, followed by the outcomes of elections and later on a full-fledged Budget for the respective fiscal.