RBI maintains pause, keeps repo rate unchanged at 6.5%

the Monetary Policy Committee (MPC), on Thursday, predictably Keep the policy’s repurchase price pendingwith indications that this rate may be steady at 6.50 per cent for the better part of FY24, with Governor Shaktikanta Das emphasizing the need to move towards the commission’s primary target of 4 per cent retail inflation.

This is the second meeting on the trot that the six-member MPC voted unanimously Maintain the status quo on the repo rateuntil Das stressed that headline inflation is still above the target of 4 percent and being within tolerance (from 2 percent to 6 percent) is not enough..

In its meeting held between June 6-8, the six-member Monetary Policy Committee decided by a majority of 5 out of 6 that they should remain focused on de-escalation to ensure that inflation is gradually in line with target while supporting growth.

Das said: “Obviously it’s a pause in this MPC meeting… Core inflation has eased (to 4.7 per cent in April), and so have all of its components as well.

“firmly focused”

Achala Jethmalani, Economist, RBL Bank

Rajani Sinha, Chief Economist, CareEdge

Mitul Shah, Head of Research, Reliance Securities

But there is no room for complacency. The MPC remains firmly focused on its inflation target of 4 percent in favor of sustainable growth.”

The Governor noted that the MPC’s goal and endeavor is to see retail inflation aligned with the 4 percent target on a permanent basis rather than on a one-time basis at any time. The primary target for monetary policy is 4 percent.

“The repo rate in the policy has been increased by 250 basis points since May 2022 and is still working its way through the system. Its full effects will be seen in the coming months,” he said.

MD Batra, Deputy Governor, noted that the comfort zone in the MPC is when inflation is on target and growth returns to potential after the shock it received from the pandemic.

“Both are working in progress. There is a little bit better progress on the growth front. Inflation is also progressing toward our target, but not as fast as growth is normalizing. So, we’ll look at both to take the next step.”

Das noted that headline (retail) inflation remains above target as per latest data and is expected to remain so as per Reserve Bank of India (RBI) forecast for 2023-2024.

Therefore, close and continued vigilance on the changing inflation outlook is absolutely essential, especially since monsoon forecasts and the impact of El Nino remain uncertain.

“On the other hand, real GDP growth in 2022-23 has turned out to be stronger than expected and is holding up quite well,” he said.

Given the current situation on the repo rate, banks are likely to keep deposit and lending rates at current levels.

Dharmakirti Joshi, Chief Economist, and Bankuri Tandon, Chief Economist, CRISIL, opined that the MPC’s status quo was on projected lines as the lagging effects of past price hikes were not yet fully felt. It also highlighted the central bank’s caution against inflation amid the prevailing risks.

CRISIL economists expect the Monetary Policy Committee to continue its stance on interest rates at the next meeting as well, as it assesses the path of inflation.

Retail inflation has been within the RBI’s tolerance range over the past two months. However, El Niño risks and uneven monsoons could support food prices. The RBI is likely to start rate cuts in January-March 2024 as growth moderates.”

Dinesh Kumar Khara, President of the State Bank of India, noted that the Monetary Policy Committee’s decision to pause was very much in expected lines.

“The communication was nuanced and designed to anchor market expectations for the future in terms of a permanent downward trajectory for inflation. … Overall, the policy is an apt statement against the backdrop of a global economy still mired in growth-related uncertainty and labor market rigidity.”