RBI Policy: Repo Rate Unchanged At 6.5%, Guv Shaktikanta Das-Led MPC Hits Pause For 4th Time In Row

On an expected line, the Reserve Bank of India (RBI) has decided to hold key rates for the fourth time in row, and continue on its wait-and-watch mode. That being said, the RBI policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.5%. Also, the six-member monetary policy committee (MPC) chaired by RBI governor Shaktikanta Das stayed on its 'withdrawal of accommodation' stance to ensure inflation progressively aligns with their target.

After the assessment of the current and evolving macroeconomic situation, the MPC members which commenced their 3-day policy meet from October 4th, decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50% on Friday.

This is in-line with expectations of economists in a poll conducted by GoodReturns between September 20-28. RBI resorted to status quo since the start of this fiscal in April, after aggresively hiking rates by 250 basis points cumulatively from May last year until February 2023 to control a stubbornly high CPI inflation.

Accordingly, the standing deposit facility (SDF) rate remains unchanged at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.

MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

It needs to be noted that 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 governor Shaktikanta Das said, "Headline inflation had surged in July driven by tomato and other vegetable prices. It corrected partly in August and is expected to see further easing in September on the back of moderation in these prices. A silver lining amidst all these declining core inflation (i.e., CPI excluding food and fuel)."

However, the overall inflation outlook, as per Das, is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices.

He added, "The MPC observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation. Economic activity, on the other hand, has remained resilient. Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting."

Further, Das also revealed that the transmission of the 250 basis points (bps) increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence the MPC decided to remain focused on withdrawal of accommodation. He added, "The MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations."

According to Das, while near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors. He explained that "Kharif onion production needs to be watched closely" as the area sown under pulses is below the level a year ago. He also believes that demand supply mismatches in spices are likely to keep these prices at elevated levels.

Hence, Das believes that the inflation trajectory will also be shaped by El Niño conditions and global food and energy prices. Together with global financial market volatility, these factors pose risks to the outlook.

Taking into account these factors, RBI projected CPI inflation at 5.4% for 2023-24, with Q2 inflation rate seen at 6.4%, Q3 at 5.6% and Q4 at 5.2%. Das said, "The risks are evenly balanced." Further, for Q1 of FY25, CPI inflation is projected at 5.2%.

In case of economic outlook, Das said, "on the demand front, steady expansion is seen in urban consumption while rural demand is showing signs of revival.11 Looking ahead, domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, government's continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalisation."

However, he also added, "Headwinds from geopolitical tensions and geoeconomic fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon, however, pose risks to the outlook."

Thereby, RBI predicts real GDP growth 6.5% for FY24, with the growth projected at 6.5% in Q2, 6% in Q3, and 5.7% in Q4 of the fiscal. Real GDP growth for Q1:2024-25 is projected at 6.6%.

The six-members of MPC are Dr. Shashanka Bhide, Dr. Ashima Goyal, Prof. Jayanth R. Varma, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shaktikanta Das.

The minutes of the MPC's meeting will be published on October 20, 2023. While the next meeting of the MPC is scheduled during December 6-8, 2023.