The Reserve Bank of India (RBI)-led Monetary Policy Committee on February 8 retained the key interest rate repo at 6.5 percent signalling that the central bank’s long battle against persistently high inflation is not over yet. The Monetary Policy Committee also decided by a 5:1 majority to remain focused on "withdrawal of accommodation", RBI Governor Shaktikanta Das said on Thursday.
The standing deposit facilty rate, which is 25 basis points lower than repo rate, is at 6.25%.
The marginal standing facilty rate, which is 25 basis points more than repo rate, is at 6.75%.
Global economy presenting a mixed picture, odds of a soft landing has increased globally. Emergence of new flash points impart uncertainty to global macro landscape, RBI Governor Shaktikanta Das said.
Repo rate is the rate at which the RBI lends short-term rates to banks. Also, the rate-setting panel retained the monetary policy stance unchanged as withdrawal from accommodation.
A persistently high inflation has been a major point of worry for the policymakers. Soaring prices, particularly that of essential food items, have been hurting poor households.
The MPC’s rate decision is no surprise as the retail inflation is still hovering above the medium target of four per cent. India’s headline retail inflation rate accelerated to a four-month high of 5.69 percent in December, according to data released by the Ministry of Statistics and Programme Implementation on January 12, thanks to an unfavourable base effect. This is the sixth consecutive pause in the last year.
Today's announcement by the central bank governor Shaktikanta Das is in keeping with the expectations of market watchers. Since the April monetary policy in 2023, the RBI has kept the repo rate unchanged at 6.5 per cent, after raising it by 250 basis points (bps) in May 2022. This was after inflation showed signs of moderating. One basis point is one-hundredth of a percentage point.
The Reserve Bank of India has chosen a dual approach to market interventions through repo and reverse repo techniques. The central bank remains steadfast in its commitment to prompt and agile decision-making, aligning with the ever-evolving economic conditions. It underscores that the policy regarding withdrawal of accommodation should be comprehended within the framework of incomplete transmission as well as inflation management.
External MPC member Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points. He also vouched for a change in stance to neutral.
"As the RBI maintains its stance of no change on interest rates for the sixth consecutive policy review, we acknowledge the stability it brings to the financial landscape. The sustained pause in the repo rate is poised to benefit India's economic trajectory positively. Moreover, the remarkable growth in capital expenditure witnessed in FY24, coupled with robust capex push by the government underscores a pivotal moment for economic resurgence. The capex push also aligns with the broader endeavour to propel India towards achieving its $5 trillion economy milestone,” said Anu Aggarwal, President & Head Corporate Banking, Kotak Mahindra Bank.
"In this monetary policy review, the RBI has maintained the repo rate unchanged at 6.5%, defying market expectations of a potential cut amidst the looming elections. This decision underscores the central bank's cautious approach, balancing economic stability, and inflationary concerns in a volatile pre-election environment. In the current economic landscape, food inflation persists as a significant concern, while core inflation has shown signs of softening, eliciting a positive response from the market. Moreover, the notable softening in commodity prices adds a further dimension to the economic outlook. In light of these evolving growth trends, the RBI remains vigilant in monitoring food price pressures, highlighting the delicate balance between stimulating growth and managing inflation," Adhil Shetty, CEO, Bankbazaar.com, said.
"Unlike market expectations, RBI's tone was not dovish. Governor Das was clear that tail risks have the possibility of undoing the work on disinflation. With RBI's inflation projection of 4.5 percent for 2024-25, any expectations of cuts coming in the current year become unlikely. We think the progress in food prices will be the key monitorable for RBI's tone in the upcoming policy. Like other central banks, higher growth for the current and next year gives RBI more headroom to be on a wait-and-watch mode," said Sujan Hajra, Chief Economist, Anand Rathi Shares and Stock Brokers.
"The MPC decision to keep the policy rate unchanged was expected. The stance is also kept at withdrawal of accommodation, that possibly is a surprise. This possibly is explained by the fiscal consolidation with Government projecting a lower deficit than target in 2023-24 and an aggressive 5.1 percent deficit target for 2024-25," said Ranen Banerjee, Partner and Leader Economic Advisory,PwC India.
"There were no major announcements hinting at an imminent easing. The RBI has been managing daily liquidity with overnight infusion, as and when required. We don't see easy monetary policy anytime soon, especially with such strong growth," said Nikhil Gupta, Chief Economist, Motilal Oswal Financial Services.
Also read: RBI MPC meeting live updates: Status quo. Real GDP growth seen at 7.3%, inflation at 5.4%