The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) agreed to keep the repo rate unchanged at 6.5 per cent at its second bi-monthly monetary policy meeting of FY24. The emphasis remains on accommodation withdrawal. The RBI also maintained its FY24 GDP growth prediction of 6.5 per cent, while CPI inflation is expected to be 5.1 per cent in FY24.
According to the RBI governor Shaktikanta Das, the MPC was determined by a majority of five out of six members to continue focusing on ‘removal of accommodation’ to ensure that inflation gradually aligns with the target while sustaining growth.
The pace of global economic activity is anticipated to slow down in 2023, according to the governor, who said that this is mostly due to elevated inflation, tight financial conditions, and ongoing geopolitical concerns.
The rate of monetary tightening has moderated in recent months, but the future path remains unknown as inflation remains above goal globally.
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According to the RBI governor, GDP growth in the first fiscal year of FY2024 is predicted to be 8 per cent, followed by 6.5 per cent in Q2, 6 per cent in Q3, and 5.7 per cent in Q4. The RBI maintained its GDP growth prediction of 6.5 per cent for the entire fiscal year 2023-24.
However, the central bank cut its retail inflation forecast for FY24 from 5.2 per cent to 5.1 per cent.
The RBI’s Monetary Policy Committee unanimously voted in April to hold the repo rate constant at 6.50 per cent, after boosting it by a total of 250 basis points since May 2022 to keep the country’s inflation under control. In its bimonthly meeting in April, the central bank reaffirmed its “withdrawal of accommodation” position.
HP Singh, Chairman cum Managing Director, Satin Creditcare Network Limited, stated that, “With inflation declining to an 18-month low of 4.7% in March, which is within the RBI’s range of 2-6% target band, the pause in the Rate was in line with expectations, and we welcome this stand. With the overall GDP growing by 7.2% in FY23 and a positive undercurrent across sectors of the economy, the cautious approach of the RBI is a reflection of growth with an eye on keeping inflation under control and supporting the key sectors of the economy. With inflation under control, the NBFC sector is expecting around 25 basis point cut in the upcoming Monetary Policy”.
Consumer pricing index-based (CPI) inflation fell to an 18-month low of 4.7 per cent in April, from 5.7 per cent in March, remaining within the RBI’s 2-6 per cent target area.
Das further stated that the standing deposit facility (SDF) rate remains at 6.25 per cent, while the marginal standing facility (MSF) rate and bank rates continue at 6.75 per cent.
Ms. Shanti Ekambaram, Whole-time Director, Kotak Mahindra Bank said that, “In line with market expectations the MPC unanimously decided to keep the Repo rate unchanged and there was no change in the stance of “withdrawal of accommodation”. The policy highlighted the stable macros – inflation trending lower, Q4 FY’23 growth strong, narrowing trade deficit, fiscal deficit in control and demand and economic high frequency data showing strength. In this backdrop the central bank maintained the GDP growth estimate of 6.5% for FY’24 while lowering average inflation expectations to 5.1% ( from 5.2% ). The need to bring down inflation to the targeted 4% level was emphasized and risks of inflation upside from Monsoons, geo political tensions, global financial market volatility and global growth deceleration were highlighted.
In all the RBI reiterated its “watchful stance” to emerging risks and a commitment to maintain price stability and providing ample liquidity for economic growth. All this in the back drop of strong economic growth and lower inflation. Rates are likely to be pause for long unless there is any dramatic shift in inflation, growth or global volatility.”
RBI Hits the Pause Button Again
“Against the backdrop of CPI inflation declining to a 18 month low of 4.7% in April and with May print expected to be lower than April, the RBI hit the pause button again and kept the repo rate unchanged at 6.5% – while maintaining uncertainty on the future course of monetary policy as inflation still remains much higher than the target of 4%, with projection for FY24 at 5.1%. RBI also maintained the GDP growth for FY24 at 6.5% – which presumably would have also aided the decision. Of course the growth and inflation projection continue to bake in a normal monsoon and hence something to watch out for!” said Manish Kothari, President and Head – Commercial Banking, Kotak Mahindra Bank Ltd.
Parry Singh, Founder & CEO, Red Fort Capital said that, “The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5 percent for the second consecutive time. This decision reaffirms the RBI’s stance of withdrawing accommodation and aims to stabilize the borrowing environment for businesses, retail customers, and financial institutions.
With the base effect stabilizing, non-banking financial companies (NBFCs) are expected to see growth in corporate loan segments. The next two quarters may see a rebound in demand for credit from NBFCs, and the benefits of this can be passed on to borrowers. This is a positive step with a long-term view of promoting the growth of the micro, small, and medium enterprise (MSME) segment and ensuring easier access to formal credit at favourable rates.
With inflation stabilizing and declining, credit demand is expected to pick up, especially in the real estate sector from both retail and businesses. Stabilization of interest rates will be critical and highlights the government’s long-term vision of a stable business environment with opportunities for value creation through formal credit.”
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