RBI keeps powder dry, repo rate remains unchanged at 6.5%. Key highlights

RBI on Thursday kept the Repo Rate unchanged by 4:2 majority, maintaining withdrawal of accommodation.  

"Inflation across the globe is receding grudgingly," stated Governor Das. "Policies are showing signs of divergence across geographies. Many central banks are moving toward policy pivots, while some have tightened rates as well."

Key highlights

Real GDP growth for 2024-25 is projected at 7.2 percent.
Quarterly Breakdown:
Q1: 7.1 percent
Q2: 7.2 percent
Q3: 7.3 percent
Q4: 7.2 percent

Projected CPI Inflation for FY25
CPI inflation is projected at 4.5% for FY25, according to Governor Shaktikanta Das.
Quarterly Breakdown: 
Q2: 4.4%
Q3: 4.7%
Q4: 4.3%
Additional Insight: The target is headline inflation, with food inflation having a weight of 46%

Public repository for digital lending apps proposed
The RBI has proposed a public repository for digital lending apps to tackle issues with unauthorized platforms. Regulated entities must report their digital lending apps to the RBI for better oversight. Additionally, the UPI-based tax payment limit has been raised from Rs 1 lakh to Rs 5 lakh per transaction.

Forex reserves hit $675 billion
Net Foreign Direct Investment (FDI) inflows doubled in the April to June 2024 quarter compared to the previous year. India's foreign exchange reserves reached a record $675 billion as of August 2, 2024. The RBI's two-way Liquidity Adjustment Facility (LAF) operations in June and July aligned overnight rates with the repo rate.

Banks and NBFCs told to keep an eye out for...
In light of a global outage that impacted industries, the RBI is advising banks and NBFCs to take remedial action to enhance operational resilience. The financial sector remains healthy and stable.

Food inflation a cause for concern
Governor Shaktikanta Das stated that while the MPC may overlook temporary spikes in food inflation, persistent high food inflation cannot be ignored due to its potential spillover effects. He highlighted that the public often perceives inflation primarily through food prices.

Governor Shaktikanta Das emphasized that the RBI cannot become complacent despite the drop in core inflation. The MPC must remain vigilant to prevent spillovers or second-round effects from persistent food inflation. The divergence between headline and core inflation necessitates continued caution, especially in an environment of high food prices.

Das noted that headline inflation increased to 5.1% in June, primarily driven by the food component, while the fuel component in the CPI basket remained in deflation. He warned that the expected moderation of headline inflation is likely to reverse in the third quarter. However, resilient and steady GDP growth allows monetary policy to focus clearly on inflation, ensuring price stability which eventually supports a period of sustained growth.

Das said Marginal Standing Facility (MSF) and Standard Deposit Facility (SDF) rates remain steady at 6.75% and 6.25%, respectively. Das emphasized the strong alignment between market expectations and the MPC's policy stance. He also pointed out that although headline inflation is projected to decrease due to a favorable base effect, this trend might reverse in the third quarter.

Global markets have been roiled in recent weeks by central bank action, with the Bank of England cutting interest rates last week, the Bank of Japan hiking, and the Federal Reserve preparing to ease amid recession fears. That may give the Reserve Bank of India reason to stay cautious after keeping rates steady for 18 months already.

But there is a chance the RBI may signal a pivot is coming months. Thursday was the last rate decision of the six-member monetary policy committee before its current four-year term expires in October. 

The MPC is in for an overhaul this year. The terms of the three external members end on Oct. 6 and can’t be renewed. The other three members of the MPC are Das, whose current term ends in early December, Deputy Governor Michael Patra, whose contract runs until early January, and Executive Director Rajiv Ranjan.