RBI Keeps Repo Rate Unchanged at 6.5%: A Focus on Inflation and Economic Outlook

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recently voted unanimously to maintain the repo rate at 6.5%. The Standing Deposit Facility Rate, Marginal Standing Facility Rate, and Bank Rate also remained unchanged at 6.25% and 6.75%, respectively. With a strong focus on managing inflation and aligning it with the target, the committee, consisting of 5 members in favor and 1 dissenting, decided to continue the withdrawal of accommodation.

Inflation remains a concern globally, with uncertainties surrounding its trajectory. The pace of monetary tightening has slowed down, but it's essential to note that inflation continues to surpass the 4% target set by the RBI. According to Governor Shaktikanta Das, the Consumer Price Index (CPI) inflation is expected to remain above the target in the fiscal year 2023-24, based on our forecasts.

One positive aspect is that the real policy rate remains in the positive territory, which helps in managing inflationary pressures. Furthermore, India's GDP has exhibited significant growth, surpassing the pre-pandemic levels by more than 10% in the fiscal year 2022-23, as highlighted by Governor Shaktikanta Das.

Let's delve into the revised GDP growth and CPI inflation forecasts:

GDP Growth:

• April-June 2023: The GDP growth forecast has been raised to 8.0% from the previous estimate of 7.8%.

• July-September 2023: The GDP growth forecast has been raised to 6.5% from the earlier projection of 6.2%.

• October-December 2023: The GDP growth forecast has been revised downward to 6.0% from the initial estimate of 6.1%.

• January-March 2024: The GDP growth forecast has been revised downward to 5.7% from the earlier projection of 5.9%.

It's worth noting that the risks to the GDP growth forecast are evenly balanced, implying a balanced outlook for the economy.

CPI Inflation:

• April-June 2023: The CPI inflation forecast has been revised downward to 4.6% from the previous estimate of 5.1%.

• July-September 2023: The CPI inflation forecast has been lowered to 5.2% from the earlier projection of 5.4%.

• October-December 2023: The CPI inflation forecast remains unchanged at 5.4%.

• January-March 2024: The CPI inflation forecast also remains unchanged at 5.2%.

To ensure efficient liquidity management, the RBI will maintain flexibility. Governor Shaktikanta Das stated that the central bank will prioritize the orderly completion of the government's borrowing program.

The domestic demand conditions continue to support economic growth, with resilient urban demand and a revival in rural demand. Additionally, manufacturing companies have seen an expansion in fixed investment during the fiscal year 2022-23. The optimistic outlook displayed in consumer and business surveys further strengthens the prospects for future growth.

In terms of external factors, the current account deficit is expected to have moderated and is considered manageable for the fiscal year 2023-24, according to Governor Shaktikanta Das. Furthermore, the Indian rupee has remained stable since January 2023, and the country's foreign exchange reserves stood at $595.1 billion as of June 2.

Governor Shaktikanta Das emphasized the need for greater flexibility in liquidity management and announced that scheduled commercial banks (excluding small finance banks) can now set their own limits for borrowing in the call and notice market, within prudential limits.

Despite the positive GDP projection for the fiscal year 2024 remaining unchanged at 6.5 percent, headline inflation remains above the target and is expected to persist, as stated by RBI Governor Das.

In conclusion, the recent decision of the MPC to keep the repo rate unchanged reflects a concerted effort to address inflation concerns and ensure sustainable economic growth. With a focus on managing inflation, maintaining liquidity, and supporting domestic demand, the RBI aims to steer India's economy on a stable and prosperous path.