RBI keeps policy interest rates unchanged for 9th time in a row

New Delhi: The Reserve Bank of India on Thursday decided to keep the key policy interest rates unchanged for the ninth time in a row and once again emphasised on bringing the headline retail inflation down to 4 per cent on a sustainable basis.

The 6-member Monetary Policy Committee (MPC) of the RBI took the decision to maintain a status quo on policy interest rates with a majority of 4:2.

The repo rate, the interest rate at which the RBI lends short-term funds to banks, has been kept unchanged at 6.5 per cent.

The standing deposit facility (SDF) rate also remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent. These policy rates, which determine liquidity in the Indian banking system and affect lending and borrowing rates by commercial banks and other financial institutions, were last hiked in February 2023.

The MPC also decided by a majority of 4 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth, RBI Governor Shaktikanta Das said while announcing the decisions of the MPC's third bi-monthly meet of the current financial year.

The Monetary Policy Committee's decision is largely on the expected lines. "The RBI expectedly kept rates and stance unchanged with unambiguous focus being retained on inflation," said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.

"With growth remaining robust the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend. We continue to expect scope for change in stance in the October policy with rate cuts beginning from December," Bhardwaj added.

Elaborating on the rationale of the MPC's decisions, the Governor said, "Headline inflation, after remaining steady at 4.8 per cent during April and May 2024, increased to 5.1 per cent in June 2024, primarily driven by the food component, which remains stubborn."

Core inflation (CPI excluding food and fuel) moderated, while the fuel group remained in deflation. The expected moderation in headline inflation during the second quarter of 2024-25 on account of favourable base effects is likely to reverse in the third quarter, Das added.

The central bank has also kept its projections on economic growth and inflation unchanged.

India's gross domestic product (GDP) is projected to grow by 7.2 per cent in the current financial year with Q1 at 7.1 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent. Real GDP growth for the first quarter of 2025-26 is projected at 7.2 per cent.

As per the RBI's Monetary Policy Statement, the Consumer Price Index (CPI) based retail inflation for 2024-25 is projected at 4.5 per cent with Q2 at 4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent. CPI inflation for Q1:2025-26 is projected at 4.4 per cent. These projections are based on the assumption of a normal monsoon.

Headline CPI inflation edged up to 5.1 per cent in June 2024 due to higher-than-expected food inflation, RBI Governor said. Food inflation, with a weight of around 46 per cent in the CPI basket, contributed to more than 75 per cent of headline inflation in May and June.

Vegetable prices increased sharply and contributed about 35 per cent to inflation in June. High inflation pressures persisted across other major food items also.

"The progress towards our goal of price stability has been uneven due to large and persistent supply side shocks, especially in food items. We, therefore, need to remain vigilant to ensure that inflation moves sustainably towards the target, while supporting growth," the RBI Governor said.

"Food inflation is a hurdle and without a durable decline in it, headline inflation cannot be tamed to 4 per cent on a sustained basis. A pick-up in food inflation in June dragged consumer inflation to 5.1 per cent," said Dharmakirti Joshi, Chief Economist at CRISIL,

"Inflation should decline in July, but the RBI will overlook it because that will be purely high-base effect," Joshi added.