RBI Monetary Policy: Central bank keeps repo rate unchanged again at 6.5%

The Reserve Bank of India (RBI) left its key lending rate untouched and struck an upbeat note on the economy, leading analysts to point to a subtle shift in its emphasis to growth.

The RBI’s Monetary Policy Committee (MPC) in its second bi-monthly meeting of FY’24 kept the repo rate, the interest rate at which it lends to commercial banks, at 6.5 per cent, its second pause in a row after a series of increases aimed at containing inflation, and lowered its forecasts for price increases in the financial year by a shade.

“RBI has now moved its priority to growth with stability. While the global inflationary momentum continues to exert pressure on emerging markets like India, the central bank, going by its commentary, feels that there is some room and more ammunition left before further action is required,” noted Virat Diwanji, Group President and Head – Consumer Bank, Kotak Mahindra Bank.

Working to sustain the ongoing economic expansion and yet contain surplus liquidity, five out of six MPC members opted for “withdrawal of accommodation to ensure that inflation progressively aligns with the target”, RBI Governor Shaktikanta Das said in his post-meeting speech.

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While consumer price inflation in March-April 2023 has eased into the resistance band, headline inflation remains above target at 4.7 per cent (though the lowest reading since November 2021) and is expected to remain so for the remainder of the year, “warranting close monitoring of the evolving price dynamics”, Das stated.

Nevertheless, RBI marginally lowered FY’24 inflation projection by 10 basis points to 5.1 per cent.

“This indicates that the MPC has come to the end of this rate hiking cycle. If the monsoon is normal and the global scenario is favourable, the Monetary Policy Committee may think about a rate cut by end CY2023 or early 2024,” interpreted Dr V K Vijayakukar, Chief Investment Strategist at Geojit Financial Services.

Taking cognisance of the global headwinds, Das also argued, “In these challenging times, the Reserve Bank of India has continued to focus on preserving price and financial stability, while ensuring adequate flow of financial resources to all productive sectors of the economy.”

RBI has also retained the gross domestic product (GDP) growth projection at 6.5 per cent for FY’24, on the back of positive domestic demand as household consumption and investment activity improves. “Urban demand remains resilient, with indicators such as passenger vehicle sales, domestic air passenger traffic, and credit cards outstanding posting double-digit expansion on a year-on-year basis in April,” Das pointed out, adding that the apex bank is also expecting higher investment from manufacturing companies in 2023-24.

The central bank has conducted variable rate reverse repo (VRRR) auctions on four consecutive days since last week, draining Rs 1.52 lakh crore from the Indian banking system to manage skewed distribution and contain excess liquidity.

“Going forward, the Reserve Bank will remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy,” the governor said.