RBI keeps Repo Rate unchanged at 6.5% in First Monetary Policy of FY25; Projects 7% GDP Growth

Shaktikanta Das

The Reserve Bank of India (RBI), under Governor Shaktikanta Das, has opted to keep the repo rate unchanged at 6.5 per cent in its inaugural monetary policy announcement for the financial year 2024-25. The decision, marking the seventh consecutive hold on the key policy rate, was reached following a comprehensive two-day review meeting by the Monetary Policy Committee (MPC).

Governor Shaktikanta Das stated that the last mile disinflation is always difficult. The central bank forecasted inflation for FY25 at 4.5 per cent, which is again higher than the target of 4 per cent.

In line with its commitment to maintaining the policy stance, the MPC has reaffirmed its position on the ‘withdrawal of accommodation.’ The central bank projects a real GDP growth rate of 7 per cent for the fiscal year 2024-25, signaling optimism amidst prevailing economic conditions.

“At present, UPI payments from Prepaid Payment Instruments (PPIs) can be made only by using the web or mobile app provided by the PPI issuer. It is now proposed to permit the use of third-party UPI apps for making UPI payments from PPI wallets. This will further enhance customer convenience and boost adoption of digital payments for small value transactions,” Governor Shaktikanta Das said.

Key highlights from the RBI MPC meeting:

The benchmark interest rate remains at 6.5 per cent, indicating the RBI’s commitment to economic stability and calibrated policy measures. In its first bi-monthly committee meeting for FY24-25, the Reserve Bank of India (RBI) maintained its 7 per cent real GDP growth forecast for the current fiscal year.

The GDP growth target for Q1 FY25 increased to 7.1 per cent from 7.2 per cent, while Q2 FY25 was updated to 6.9 per cent, up from 6.8 per cent. The growth rate for Q3 FY24 has remained constant at 7 per cent from earlier projections.

The RBI anticipates retail inflation to average at 4.5 per cent for the fiscal year, down from 5.4 per cent in the previous year, with continued uncertainties in food prices impacting the inflation trajectory. Despite global fluctuations, the Indian rupee has exhibited stability, maintaining its position among major currencies in FY24.

As geopolitical tensions persist and trade routes face disruptions, the RBI remains vigilant, aiming to strike a balance between economic growth and price stability. The next MPC meeting is scheduled to convene from June 5 to 7, 2024, underscoring the central bank’s commitment to regular policy reviews and adjustments.

The RBI’s steadfast approach towards maintaining a conducive economic environment reflects its resolve to navigate challenges while fostering sustainable growth in the Indian economy.

Explore the insights shared by industry leaders:

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, said, ” The MPC on expected lines maintained status quo on rates and stance. While low core inflation provides comfort, the uncertainty on food inflation remains a worry. Further, the higher US yields, higher oil prices and other commodities along with possible delay in Fed’s rate easing cycle will keep the MPC wary. Accordingly, we do not see much scope for any rate easing until Q2FY25. Earliest possibility of rate easing can emerge in Q3FY25.”

Anu Aggarwal, President & Head Corporate Banking, Kotak Mahindra Bank, said, ” The monetary policy stance announced today reflects that the RBI is evenly balancing the two divergent objectives of growth and inflation. It seems a case of full commitment to growth with even higher commitment to inflation targets. I hope we will see sustained growth and softened inflation.”

Poonam Tandon, Chief Investment Officer at IndiaFirst Life Insurance Company, said that, “The Monetary policy was on expected lines on status quo on rates and no change in stance, the focus of the MPC to bring the inflation to 4% on a sustainable basis. The RBI Governor has stated that they will be nimble-footed with respect to liquidity. The GDP has been pegged at 7% for the year and the inflation at 4.5%. This careful stance reflects concerns over potential inflationary pressures arising from volatile food prices, recent upticks in oil prices, and robust economic growth. The policy also gives importance to growth while acknowledging inflationary risks from rising oil prices and volatile vegetable prices. The Governor also stated that the Rupee has been one of the most stable currencies which reflects India’s sound macroeconomic fundamentals, financial stability and improvements in the external position. All in all, it is a rational policy with a focus on growth and price stability.”

Sanjay Agarwal, Founder, MD & CEO, AU Small Finance Bank, stated, “RBI’s maintenance of status quo on the repo rate and the policy stance marked by ‘withdrawal of accommodation’ is a prudent decision amidst increasing geopolitical uncertainties and any adverse climate impact. Room for monetary policy easing could emerge in the coming months if inflation glides lower along the projected trajectory. Additionally, the flexibility allowed to SFBs to manage interest rate risk through use of permissible interest rate derivatives is a welcome step.”

Shishir Baijal, Chairman and Managing Director, Knight Frank India, said that, “The RBI’s decision to keep the REPO rate unchanged at 6.5%, aligns with expectations and is greatly welcomed. This move towards maintaining stability in lending rates bodes well for the real estate sector, which has been consistently growing. It also provides added support to consumers, ensuring economic growth remains robust. Furthermore, the Governor’s optimism is bolstered by the resilience in domestic macro fundamentals. With the government’s revised GDP growth projection for FY 24 at 7.6%, Manufacturing PMI hitting a 14-year high, strong Services PMI, and high FOREX reserves, sentiment is further uplifted, promising sustained long-term growth for the domestic economy”

Murthy Nagarajan, Head – Fixed Income, Tata Asset Management, said that, “The monetary policy was on expected lines with repo rates maintained at 6.50%. GDP Growth was maintained at 7.00% for the current financial year. CPI inflation for current year is expected to be at 4.50%. RBI again reiterated its stance of bringing CPI inflation to 4.00% levels on a durable basis and maintained that the last mile of bringing the CPI inflation to the 4% level is the toughest. The Rupee is expected to trade in the band of 83 to 85 against the dollar due to FII inflows in debt. RBI is expected to follow the US federal Reserve in cutting rates provided monsoons are normal and commodity prices remain range bound. The ten-year yield is expected to be trade in the band of 7.00% to 7.15% levels as rate cut expectation is pushed to the second half of this financial year.”

Akhil Mittal, Senior Fund Manager-Fixed Income, Tata Asset Management, stated, “Monetary policy was largely on expected lines, with no change in stance or policy rates. Governor mentioned continued focus to get inflation within target zone on sustainable basis, thereby indicating no near term likely hood of policy easing. Growth forecast have been largely left unchanged and inflation (CPI) forecast has been bought down by approx. 10 bps. With financial markets passing through tough economic cycles and geo-political uncertainty still prevailing, RBI has chosen path of stability, and hence policy is expected to be directed on same lines. We do not expect much impact in markets, though we do expect some bit of steepness in yield curve (from the current virtually flat curve).”

Vikas Garg, Head of Fixed Income, Invesco Mutual Fund, said that, “On expected lines, status quo on policy rates at 6.5% and stance as “withdrawal of accommodation”. FY25 inflation maintained at 4.5% even though the projection for 3 out of 4 quarters lowered. 2QFY25 expected to see inflation dropping below 4%, almost after 5 yrs. Despite elevated crude prices & food inflation, several comments like “Goal in sight” & “Elephant has gone to Forest” gives a dovish tilt on inflation. Fundamental factors remain healthy as reflected in FY25 GDP at 7%, manageable CAD and record high Fx reserve. Overall, it doesn’t disrupt the expectations of rate cuts in 2HCY2024, in line with global rate cut cycle. Market focus will be back to fiscal demand-supply dynamics which looks extremely favorable with Govt’s rapid fiscal consolidation over next 2 years, FPI inflows and particularly light G-Sec borrowing calendar in 1HFY25.”

Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Company Ltd, said that, “As widely expected, MPC continues to persist with its no change in stance and rates and clearly no negative surprise is indeed a positive from markets standpoint, as it underscores policy stability. MPC continues to be nimble and has deftly balanced the macro backdrop of robust growth and inflation above target of 4%. Although considerable progress has been made in bringing the inflation below its peak levels. Further, MPC has been cognizant of robust foreign flows along with ongoing geopolitical tensions and risks emanating from higher crude prices and has thus refrained from giving any premature policy pivots. MPC continues to reemphasize the achievement of inflation target on a durable basis and distinctly indicates rate change in the near term is unlikely. Overall, a well-anchored policy exercising caution and being data dependent amid the uncertainty in global markets coupled with key domestic events on the anvil.”

George Alexander Muthoot, MD, Muthoot Finance, said that, “On expected lines the RBI kept the policy repo rate unchanged while maintaining the stance on ‘withdrawal of accommodation’. While the RBI does remain cautious on the inflation front, we believe moderating inflationary pressures, coupled with the realization of normal monsoon may open up the possibility of rate cuts by the RBI in first half of fiscal 2024-25. We are encouraged by the resilience of the global economy, continued economic growth momentum in India, coupled with relative rupee stability. Steady pick up in investment activity and strengthening of rural demand conditions bode well for the economy and further fuels our optimism towards steady demand for gold loans, vehicle loans and home loans during the year.”

“We appreciate RBI’s initiative of regularly engaging with multiple stakeholders to simplify regulations and reduce compliance burden. The implementation of recommendations of the Regulations Review Authority (RRA 2.0) is a testament of the RBI’s commitment. At Muthoot Finance, we remain committed to maintaining the highest standards of corporate governance and compliance. We are in alignment with RBI’s view point that regulated entities should prioritise compliance and corporate governance and we believe this is paramount for ensuring sustainable growth for India while also safeguarding customers’ interests”, he added.

Kishore Lodha, Chief Financial Officer, U GRO Capital Ltd, said, “Today’s RBI policy is in line with expectations – all benchmark rates have remained unchanged. The repo rate stood unchanged at 6.5% SDF rate and the MSF rate has remained the same as well. The growth forecast for this year has been projected as 7.6% and next year it has been projected as 7.1%. India is likely to grow the highest among all the major economies.”

Liquidity is not too much of a concern since the RBI is monitoring the situation tightly. Hence, the RBI continues to focus on inflation, a trend running for almost a year. Now, inflation has moderated to 5.1%, where the RBI is looking at a target of 4% and the next year’s projection is 4.5%. We will have to wait and watch to see when the RBI will cut the benchmark rates, but this can be expected once the inflation rate stabilizes lower than 5%.

The monsoon is expected to remain good, but crude prices are inching up, which again may push up inflation. Thus, food and fuel remain two areas of concern. Some of the other important announcements include the RBI reviewing the LCR framework for banks for which it will shortly circulate the draft framework. UPI transactions through third-party apps have been allowed, along with cash deposits through UPI. the current account deficit is stable and the overall inflow of remittances has been robust. Thus, apart from inflation, the rest of the economic parameters appear quite robust at this point.”

Alok Singh, Head- Treasury, CSB Bank, said that, “Monetary Policy stance has been in line with RBI guidance and market expectation. RBI has been watching global and local factors closely. It finds the risks evenly balanced. In our view, Growth and Inflation will be the key drivers of the policy stance going forward. We await the LCR paper which can have an impact on Bank’s liquidity.”

Mandar Pitale, Head Treasury, SBM Bank (India) Limited, said, “MPC has delivered policy verdict on expected lines with a firm commitment to focus on a 4% goal post for CPI securing using appropriate monetary policy tools. Robust growth expected in the near future will provide the policy space to remain focused on inflation. Recent volatility in Crude prices with a bias to move up and elevated food inflation will remain on the top of MPC watchlist.

The review of LCR framework for managing liquidity risk, due to the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels may result in more liquidity buffer to be maintained by Banks.

Forecasted CPI inflation for Q1 FY 24-25 is 4.9% and is further forecasted significantly lower to 3.9% in Q2. This may be considered as a lead indicator to estimate the first policy rate easing in October MPC preceded by the probable change of stance to “neutral” in August MPC meeting; if the inflation trajectory turns out as projected by MPC.”

Parijat Agrawal, Head – Fixed Income, Union Mutual Fund stated, “As expected MPC kept the policy rate and stance unchanged. The softening of core inflation gives sufficient room to MPC, however volatile food inflation and recent uptick in crude and other commodity prices is to be watched and MPC kept the full year’s projection at 4.5%. The strong momentum in growth also gave comfort to MPC to align the CPI on a durable basis to 4%. We expect rate cuts in the 3rd quarter of FY 25, possibly after the US FOMC starts rate cut cycle. RBI is expected to keep liquidity neutral so that further transmission of higher rates can continue. There is a possibility of modification of the LCR framework going forward which may augur well for bonds.”

Rahul Bhuskute – Chief Investment Officer, Bharti AXA Life Insurance stated that, “Robust growth prospects provide the policy space to remain focused on inflation as the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation. They also remain cautious of the recent increase in crude oil prices, the worsening in geopolitical conflicts and the volatility in international financial markets. The MPC, therefore, decided to keep the policy rate unchanged at 6.50 per cent in this meeting and remain focused on withdrawal of accommodation. The MPC retained its real GDP growth projection of 7% in FY25. However, they noted headwinds from geopolitical conflicts, volatility in international financial markets.

RBI will remain nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. RBI will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner that preserves financial stability.”

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