Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said that the monetary policy committee (MPC) has decided to keep the repo rate unchanged at 6.5 per cent with readiness to act should the situation so warrant. Since May last year, the central bank has increased the rate by 250 bps over inflation concerns.
This is in contrast to what many economists had predicted. A Reuters Poll had predicted a rate revision of about 25 bps. Of the total 36 respondents, 20 expected the central bank to continue its 'withdrawal of accommodation' stance, while the remaining 16 predict a shift towards a neutral stance.
Talking about the rate revision and financial conditions, Das said: "While we have kept the policy rate unchanged, this decision was taken based on our assessment of the macroeconomic and financial conditions with reference to information available up to today. Our job is not yet finished and the war against inflation has to continue until a durable decline in inflation closer to target is seen."
The Repo Rate can be defined as the rate at which the central bank lends money to commercial banks or financial institutions operating in the market against government securities.
Along with the repo rate, the standing deposit facility (SDF) rate is unchanged at 6.25 per cent. Moreover, the marginal standing facility (MSF) and bank rates have also been left unchanged at 6.75 per cent.
Das explaining the rationale said: "While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns. Headline inflation is moderating but remains well above the targets of central banks. These developments have led to heightened volatility in global financial markets as reflected in sizeable two-way movements in bond yields, fall in equity markets and the US dollar shedding its gains from its peak of September 2022."
The RBI Governor further added that the repo rate has been hiked by 250 bps in the last 11 months, though the effective rate hike, has been 290 bps. "We have to be extremely prudent in our action. When we started the rate cut cycle in Feb 2019 to support growth, CPI was around 2 per cent and repo at 6.5 per cent. Now policy rate is 6.5 per cent, but inflation is 6.4 per cent as of February 2023."
"Overall inflation is above target, and monetary policy can still be regarded as accommodative as per current rates," he added.
Das pointed out that the RBI has been at work in taking macro and micro-prudential measures to ensure financial stability. "Our supervisory system has also been strengthened in recent years. The Indian banking system remains sound and healthy with strong capital and liquidity buffers including asset quality and PCR," he said.
He added that the central bank is focused on the withdrawal of monetary policy accommodation.
"The MPC voted by 5 out of 6 majority to remain focused on the withdrawal of accommodation to ensure inflation aligns with a target while focusing on growth," RBI governor Shaktikanta Das said on Thursday.
Speaking about global factors, RBI Governor Das said that the global economy facing a renewed phase of turbulence. “We are witnessing unprecedented uncertainties in geopolitics and economy. Bank failures and contagion risks are forcing central banks to take additional notice," Das said on Thursday.
Inflation forecast for FY24
RBI Governor Das said that the MPC has also decided to marginally lower the inflation forecast to 5.2 per cent to 5.3 per cent earlier. Inflation Estimates for FY24
FY24: 5.2%
Q1FY24 5.1%
Q2FY24 5.4%
Q3FY24 5.4%
Q4FY24 5.2%
He added that the central bank will continue to adopt measures to tame inflation in the country. "Regulators need to identify vulnerabilities to safeguard the stability of the financial system and lenders need to watch out for asset liability mismatch and capitalisation levels, he said.," Das said on Thursday.
Industry reaction
"After raising the repo rate by 250 basis points since May last year to bring inflation within its tolerance limit, the RBI has pressed the pause button on the repo rate hike to check the progress the central bank has made so far, sending positive sentiments across sectors. Homeowners will meet this announcement with a sigh of relief since they were reeling under the pressure of lengthening loan tenors and rising interest rates,” said Adhil Shetty, CEO, Bankbazaar.com.
"The decision to maintain the repo rate unchanged is a positive sign for the banking and NBFC sectors, and it is expected to benefit other sectors such as real estate and infrastructure. However, the persistent inflation and global banking crisis remain areas of concern, and it is crucial to monitor the overall impact of the past rate hikes. From a stock market perspective, the RBI MPC meeting's decision to maintain the repo rate unchanged is expected to create positive momentum, especially for the banking sector," said Sonam Srivastava, Founder at Wright Research, an investment advisory firm.
"We laud the RBI for maintaining the repo rate, in a move that is bound to go a long way in sustaining the sales momentum that we’ve witnessed in the residential segment. Given the potential adverse impact of a hike in repo rate and its ripple effect on both Housing demand and supply, we, at CREDAI, are extremely pleased and welcome the central bank’s decision. This move would provide a further boost for the affordable and mid-income housing segments, in particular," said Boman Irani, President-Elect, CREDAI National.
“The RBI’s pause is like Sachin's stroke on a tricky pitch but with eyes set in and having the luxury of hitting the ball wherever he wanted. The RBI had the option of a rate hike or a pause. The pause was not entirely unexpected. The RBI will watch developments and data before taking the next call. The market expects the RBI to fetch maximum run and win the match on inflation and growth, no matter which direction they hit the ball,” said Nilesh Shah, MD, Kotak Mahindra Asset Management Company.
Also read: MPC announcements: RBI projects GDP growth for 2023-24 at 6.5%