Stability in Uncertain Times: RBI Maintains Repo Rate at 6.5% in Fifth Fiscal Policy

Shaktikanta Das

Reserve Bank of India (RBI) Governor Shaktikanta Das released the fifth monetary policy of the fiscal year 2023-24 today, after a two-day review amid robust macroeconomic fundamentals and stable domestic markets.

The RBI maintained its expected stance and policy rates on Friday, December 8. The RBI’s Monetary Policy Committee (MPC) unanimously decided to keep the repo rate at 6.5 percent following its December meeting. The policy stance of the MPC on removal of accommodation’ was maintained by a majority of 5 out of 6 members. However, Das emphasised that the RBI will remain vigilant and ready to implement appropriate policy measures if necessary.

Despite the fact that the global economy remains shaky, India’s economy is resilient, according to the central bank. It kept the current fiscal year (FY24) CPI estimate but raised its real GDP projections.

According to the Monetary Policy Statement, 2023-24, the next meeting of the MPC is set for February 6-8, 2024.

“The Reserve Bank of India’s Monetary Policy Committee after a detailed assessment of the evolving macroeconomic developments, has decided unanimously to keep the repo rate unchanged at 6.5 per cent,” said RBI Governor Shaktikanta Das amid India’s better-than-expected economic growth.

Key announcements to remember

GDP growth forecast

RBI Governor Shaktikanta Das revealed that the MPC has increased the GDP prediction for 2023-24 (FY24) to 7 per cent from 6.5 per cent previously. Das stated that domestic economic activity is doing nicely.

Inflation forecast

The inflation forecast for FY24 has remained constant at 5.4 per cent. Das stated that, while core inflation has been broadly falling, dangers to food inflation persist. He also stated that food inflation could cause an increase in inflation figures in November and December.

Payment restrictions for UPI

The RBI increased the United Payments Interface (UPI) payment limitations for hospitals and educational institutions to Rs 5 lakh per transaction from Rs 1 lakh previously. Das also stated that the RBI will establish criteria for loan product online aggregators in order to increase transparency in digital lending.

Commercial sector expansion

According to the RBI, the buoyancy in public sector spending, above-average capacity utilisation in manufacturing, and domestic demand would all contribute to growth. The entire flow of resources to the commercial sector was Rs 17.6 trillion in the current fiscal year, up from Rs 14.5 trillion the previous year.

Virat Diwanji, Group President and Head – Consumer Bank, Kotak Mahindra Bank Ltd, said that, “The RBI monetary policy is on the lines of the wider market expectation. However, the GDP growth projection at 7% is higher than anticipated but seems clearly inspired by the stellar show in the Sept quarter GDP numbers. With the robustness seen across the economy, including the likelihood of a lesser drag on the exports front and private consumption remaining buoyant, the target seems achievable.

Given this assured rate environment, the loan demand will continue to be strong even though there are concerns about the impact of the risk weightage changes on unsecured lending that might lead to a slowdown there. For the consumer banking, the scenario looks very promising. The rural consumption is improving, adding to the resilience of the Indian economy.”

Rahul Bhuskute, Chief Investment Officer, Bharti AXA Life Insurance, said “With 1 year ahead inflation projected to be below 5% and closer to RBI target of 4%, RBI chose to maintain a status quo on policy rates, which was widely anticipated. Tone of the MPC was fairly balanced, with the focus on inflation target being partly offset by a fresh mention of risk of overtightening. The FY24 growth projection by RBI has significantly revised up to 7% . Not just that, the higher growth vibe has continued in FY25, with the RB forecasts for the first three quarters of that year being upgraded to an average of 6.5% – again higher than what the markets were expecting.

Given the actual prints for FY24 are much higher than what the market expected at the start of the year (& much closer to RBI’s forecast), the market would give the benefit of doubt to RBI. What is also proving to be a tailwind is that the wider global growth estimates have also been revised upwards. Clearly geo-politically, politically and financially, India seems to be in a much better position as compared to almost every other large economy in the world. This can be clearly seen in the FPI flows, as well as the relative stability of the rupee over the last year, when there was significant turmoil happening around us. Concerns around election time populist measures on both the fiscal and monetary sides have also been allayed. With the outcomes of the last round of state elections, the comfort around political stability and policy continuity has also been reinforced. Systemic Liquidity in the banking system has gradually contracted since the last RBI policy, led by festive currency outflow and RBI interventions in the G-sec and forex market. Thus, RBI has iterated that the need for OMO sales has not arisen yet.

Going forward, RBI is expected to hold rates till end of FY24, with any rate cuts hinging on materialized inflation- growth dynamics.”

Suresh Khatanhar, Deputy Managing Director, IDBI Bank, says, “The decision of the central bank to keep policy rates unchanged is in line with expectations. The Indian economy is showing resilience with GDP growth for Q2 having exceeded forecasts, which is a good sign of a sustainable growth momentum. As fundamentals of the economy remain strong with banks and corporates reporting healthier balance sheets and fiscal consolidation on course, the external balance with strong forex reserves provides a cushion against external shocks. A broad-based easing in core inflation certainly points towards past monetary actions yielding desired results. Domestic economic activity is holding up well as assessed by the RBI and the MPC remains alert and prepared to undertake appropriate policy actions as warranted – this provides a good sense of linear growth across sectors for the remaining part of the financial year.”

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, “Expectedly the MPC has maintained a status quo in rate and stance. The MPC has retained focus on 4% inflation being the medium target, with monetary policy actions to ensure disinflationary trends ahead. We continue to expect prolonged pause by the MPC, with liquidity tools being more closely if necessary to manage the policy stance.”

Anu Aggarwal, President & Head Corporate Banking, Kotak Mahindra Bank said, “With the repo rates unchanged in the third and final quarter of the year, the MPC seems familiar with the governor’s intent to bolster economic growth and ensure continued resilience in the economy. We note the government’s sustained efforts in driving an investment push in India, healthy corporate profits, and a reduction in bank non-performing loans which will keep investment buoyant despite elevated input costs. We also expect India’s exports to perform well, propelled by performance in services exports. Fighting rising oil prices and inflation remains an ongoing concern due to several factors globally. However, the prolonged pause on repo rates will fare well for corporate India.”

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