New Delhi: As widely expected by economists and market-watchers, the Reserve Bank of India (RBI)'s Monetary Policy Committee (MPC) on Friday decided to keep the policy repo rate unchanged at 6.50%.
Repo rate refers to the interest rate at which the RBI lends to commercial banks. A high repo rate means cost of borrowing for banks going up and as a result leads to rise in loan EMIs.
With the central bank holding the key interest rate, EMIs for housing, car, business and other loans would not rise.
"The MPC met on 4th, 5th and 6th October 2023. After a detailed assessment of the evolving macro-economic and financial developments, and the outlook it decided unanimously to keep the policy repo rate unchanged at 6.5%," said RBI Governor Shaktikanta Das while making the monetary policy statement for the month of October.
Consequently, the standing deposit facility (SDF) rate remains at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
The MPC also decided by a majority of 5 out of 6 members to remain focussed on withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth.
Sharing the rationale behind the MPC decision, Governor Das said that headline inflation had surged in July driven by tomato and other vegetable prices which corrected partly in August and is expected to see further easing in September on the back of moderation of these prices.
He further said that a silver lining amidst all this is declining core inflation (CPI inflation excluding food and fuel).
"The overall inflation outlook, however, is clouded by uncertainties from the fall in Kharif sowing for certain key crops like pulses and oilseeds, lower reservoir levels and volatile global food and energy prices," Das said.
The Governor said that the MPC observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation.
"Economic activity on the other hand has remained resilient. Taking into account the evolving inflation, growth dynamics and the cumulative policy repo rate hike of 250 basis points, which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.5% in this meeting of the MPC," Das said.
He noted that the cumulative transmission of the 250 basis points increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence the MPC decided to remain focussed on withdrawal of accommodation.
"The MPC remains highly alert and prepared to undertake timely policy measures as may be necessary in order to align inflation to the target and anchor inflation expectations," he said.
In his opening statement, the Governor said that India is poised to become the new growth engine of the world.
The RBI Governor also said that the twin balance sheets stress that was encountered a decade ago has now been replaced by a twin balance sheet advantage with healthier balance sheets of both banks and corporates.
The central bank has maintained its earlier GDP growth forecast at 6.5% for the current financial year 2023-24.
The RBI Governor said that domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalisation.
He, however, noted various challenges such as geopolitical tensions, volatility in global financial markets, global slowdown and uneven monsoon which pose risks to the outlook.
"Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5% with Q2 at 6.5%; Q3 at 6.0%; and Q4 at 5.7%. . The risks are evenly balanced," Das said.
The RBI has projected retail inflation at 5.4% for the current financial year.
"We believe that inflation risks remain on the upside given weather related impact as well as commodity prices. Global monetary conditions will also weigh on RBI’s policy decisions. The good part is that growth remains resilient and core inflation remains under check. We maintain our call for a prolonged pause on repo rate at 6.5% well into FY2025 while liquidity over the medium term will be aimed at being close to neutral," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. (UNI)
