08-06-2023 : Mumbai, June 8: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) made an important decision today by keeping the repo rate unchanged at 6.50%. This move comes in light of the downward trend in retail inflation, which is currently within the RBI’s target range. The repo rate is the interest rate at which the RBI lends to commercial banks, and a high repo rate increases the cost of borrowing for banks, subsequently leading to a rise in loan EMIs.
The MPC, led by RBI Governor Shaktikanta Das, unanimously decided to maintain the repo rate after considering the prevailing economic situation and outlook. Additionally, the standing deposit facility (SDF) rate will remain at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate will stay at 6.75%.
Earlier this year, between May 2022 and February 2023, the MPC had raised the repo rate by a cumulative 250 basis points (2.5 percentage points) to 6.50% in an effort to curb rising inflation. However, in April, the MPC hit the pause button on the benchmark lending rate.
The Consumer Price Index (CPI) based inflation showed signs of moderation, recording an 18-month low of 4.7% in April 2023, falling within the RBI’s target range of 2-6%. The MPC’s primary responsibility is to keep inflation in check and maintain price stability.
Commenting on the MPC’s decision, Suvodeep Rakshit, Senior Economist at Kotak Institutional Equities, stated that the RBI’s decision to maintain the status quo was expected given their cautious stance on inflation. He highlighted that inflation is projected to remain above the 4% target for the foreseeable future.
It is worth noting that despite the consistent increase in the policy repo rate, credit offtake has not decreased and continues to grow steadily due to sustained demand. Aditi Gupta, Economist at Bank of Baroda, stated in a recent report that overall credit demand in the economy is expected to remain robust at 12-14% in FY24, following a growth of 15% in FY23. This moderation can be attributed to a high base and a slight slowdown in GDP growth from 7.2% in FY23 to an estimated 6-6.5% in FY24.
The Indian economy surpassed market expectations, recording a healthy growth rate of 7.2% in FY23, with a significant boost in the January-March quarter (Q4), where GDP accelerated to 6.1% year-on-year.
In its monetary policy statement, the RBI retained the real GDP estimate for FY24 at 6.5%, with projected growth rates of 8% for Q1:2023-24, 6.5% for Q2, 6% for Q3, and 5.7% for Q4, with risks evenly balanced. Governor Das mentioned that the near-term inflation outlook looks more favorable than it did during the April MPC meeting, thanks to the successful rabi harvest remaining largely unaffected by adverse weather events. However, uncertainties remain regarding the spatial and temporal distribution of the monsoon and the interplay between El Nino and the Indian Ocean Dipole (IOD).
Geopolitical tensions, uncertainties surrounding the monsoon, international commodity price volatility (especially for sugar, rice, and crude oil), and fluctuations in global financial markets pose upside risks to inflation, according to Governor Das. Considering these factors, assuming a normal monsoon, the RBI has projected CPI inflation at 5.1% for 2023-24, with rates of 4.6% for Q1, 5.2% for Q2, 5.4% for Q3, and 5.2% for Q4.
Governor Das highlighted the RBI’s focus on preserving price and financial stability while ensuring adequate flow of financial resources to all productive sectors of the economy, given the prevailing economic situation in advanced economies and global headwinds. He stated that domestic macroeconomic fundamentals are strengthening, with resilient economic activity, moderated inflation, narrowed current account deficit, comfortable foreign exchange reserves, and ongoing fiscal consolidation. Additionally, he noted that the Indian banking system remains stable and resilient, credit growth is robust, and domestic financial markets have evolved in an orderly manner.