RBI Maintains Repo Rate at 6.5% Amidst Economic Projections for FY25

RBI Governor Shaktikanta Das

The Reserve Bank of India (RBI) has opted to keep the repo rate at 6.5 per cent, marking the eighth consecutive session of stability, in its pivotal second meeting for the fiscal year 2025. The decision, announced on Friday, follows a thorough assessment by the RBI’s six-member Monetary Policy Committee (MPC), with a vote count of 4:2 in favour of maintaining the status quo.

Led by RBI Governor Shaktikanta Das, the MPC reiterated its stance on the ‘withdrawal of accommodation’, affirming its commitment to navigate the economic landscape with caution amidst evolving global and domestic dynamics.

One of the key highlights of the meeting was the upward revision of India’s GDP growth forecast for FY25, now pegged at 7.2 per cent, reflecting a surge from the previous estimate of 7 per cent. This optimistic outlook underscores the resilience of the Indian economy, which is poised for sustained expansion.

Read more: RBI to launch interoperable payment system for enhanced digital transactions

Despite the buoyant growth projections, concerns linger over inflationary pressures, with the CPI forecast maintained at 4.5 per cent for FY25. Governor Das acknowledged the persistent challenges high food inflation poses, tempering the overall decline in inflationary trends. However, he expressed optimism regarding a potential moderation in CPI, projected at 4.5 per cent for the fiscal year, contingent upon favourable monsoon conditions.

Addressing the financial sector’s performance, Governor Das underscored its robust health, underpinned by sound asset quality and enhanced profitability across banking and NBFCs. While acknowledging isolated concerns, he reassured stakeholders of the sector’s overall stability.

In response to the escalating threat of digital fraud, the RBI proposed establishing a Digital Payments Intelligence Platform aimed at enhancing network-level intelligence and real-time data sharing within the digital payments ecosystem. This proactive measure aligns with the RBI’s commitment to fortify the resilience of India’s financial infrastructure against emerging risks.

Reflecting on the external economic landscape, Governor Das noted a shift in Foreign Portfolio Investor (FPI) sentiment, with net outflows of $5 billion recorded since the commencement of FY25. Despite this, he reiterated confidence in India’s attractiveness as an investment destination, emphasising the need for vigilance amidst evolving market dynamics.

The MPC’s decision underscores the RBI’s proactive approach to navigating the intricate balance between stimulating growth and maintaining price stability. As India charts its course towards economic recovery, the MPC remains steadfast in its commitment to fostering a conducive monetary environment conducive to sustainable growth.

Check out industry leaders’ viewpoints:

Dr. Poonam Tandon, Chief Investment Officer, IndiaFirst Life Insurance Company, said that, “The MPC kept rates  unchanged and maintained the withdrawal of accommodation stance. The resilient growth and  low inflation has made it possible to hold rates at the present level. The Governor mentioned that input costs and food inflation are still high and could pose risks to upside. On the whole, it is expected that MPC  will keep rates on hold for another couple of quarters.”

Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, stated, “As expected, the RBI kept its policy rate and stance unchanged. Although, the MPC decision saw two dissents instead of the one seen in the previous policy. The one positive out of the policy was the upward revision in the GDP growth forecast to 7.2% from 7% earlier for FY25. On the other hand, inflation forecasts were kept unchanged.”

“The RBI remains in a wait and watch mode to assess domestic developments like the monsoon performance, food inflation, and the new fiscal strategy before moving on rates. We continue to see the possibility of a rate cut in Q4 2024.”

“Despite the governors’ emphasis that monetary policy decisions are driven primarily by domestic considerations, we think that any rate cut action could end up being aligned with the timing of the Fed’s rate cut cycle to limit financial market volatility. On the regulatory front, the increase in bulk deposit limit to INR 3 crore from INR 2 crore, signals the RBI’s intention to encourage banks to garner greater retail deposits to fund credit growth,” he added.

Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance Company, said that, “The outcome of the RBI’s monetary policy for June’24 was broadly as per market expectations, except for the fact that the decision of the rate-setting panel was taken with a majority of 4:2. The RBI seemed to be very confident that the growth momentum of the economy will continue and has accordingly revised the real GDP growth for FY25 from earlier 7% to 7.2%. The reason cited for maintaining the repo rate at 6.5% and holding on to the stance of withdrawal of accommodation was due to ongoing food inflation concerns and global uncertainties springing up negative surprises.

The RBI MPC left its inflation forecast for this fiscal year unchanged at 4.5 percent, expressing its commitment to bring the inflation level back to the target of 4% on a durable basis. The RBI governor also assured and emphasised the importance of maintaining an orderly liquidity position in the financial market, and its approach will be nimble and flexible for the same. We expect the RBI to continue to focus on fine-tuning liquidity conditions through VRR/VRRR auctions in order to align the overnight rates with the repo rate. However, larger-than-expected FPI flows could see the use of durable instruments.”

“The MPC meeting outcome was cheered by the equity market, but the debt market didn’t react much to the MPC meeting announcement. The market would perhaps be more keen to look for the Union Budget announcement on the government’s fiscal roadmap going forward. Insurance companies with a greater focus on fixed-income portfolios in their life funds would not have been significantly impacted by this MPC decision. The equity portfolio of the insurance companies has made some positive MTM gains, though”, he added.

Ashwani Dhanawat , ED & Chief Investment Office, Shriram General Insurance Company, said that, “As expected MPC voted to keep the repo rate unchanged at 6.50% and retained its stance as withdrawal of accommodation. However, this time two out of six members (Dr. Goyal and Prof. Varma) voted for 25bps cut and change in stance to neutral. Overall policy remains cautious with uncertainty on food inflation outlook. The heatwave conditions and low reservoir levels have added to food inflation risks. Monetary policy remains ‘squarely focused on inflation’, with strong growth providing policy space to remain on pause.”

Ajay Kumar Srivastava, Managing Director & CEO of Indian Overseas Bank, said, “We welcome the decision of RBI maintaining a status quo on the repo rate by keeping it unchanged at 6.5% and its GDP growth expectation at 7.2% for FY24. The decision to continue remaining focused on the withdrawal of accommodation reflects a balanced approach to sustain economic growth while keeping inflation in check. RBI’s decision on e-mandates for recurring payments to be extended to fastags, introduction of auto replenishment of UPI-like wallet, and establishment of a digital payments intelligence platform, is all set to promote a resilient banking sector.”

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