The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5 percent for the second straight meeting in the June policy given the significant correction in the CPI inflation trajectory. Reserve Bank governor Shaktikanta Das-headed Monetary Policy Committee (MPC) met on June 6, 7, and 8 for this review.
The MPC voted unanimously to keep the repo rate unchanged. It decided to take a pause after consecutive rate hikes in 6 previous policies.
"Our monetary policy actions are yielding desired results giving us space to keep the rates unchanged in this meeting," RBI Governor Shaktikanta Das said.
The central bank has already increased the repo rate by a total of 250 basis points since May in a bid to contain inflation. This was the second time after April policy review, when the RBI kept the rates unchanged.
However, the Governor highlighted that the MPC will take further decisions promptly and appropriately as required, adding that “we need to maintain Arjuna's eye on evolving inflation scenario”.
Das said that the goal is to achieve the inflation target of 4 percent and keeping inflation within the comfort band of 2-6 percent is not enough. Near-term inflation risk has moderated but pressures remain, he further mentioned.
Meanwhile, the MPC voted by a 5:6 majority to remain focussed on the ‘withdrawal of accommodation’ to ensure inflation aligns with the target while focussing on growth.
The standing deposit facility (SDF) will remain unchanged at 6.25 percent and the marginal standing facility (MSF) and bank rates also remain unchanged at 6.75 percent.
“We can derive satisfaction from the fact that the Indian economy and financial sector stand out as resilient. RBI has continued on focusing stability. Domestic macro fundamentals are strengthening,” said the Governor.
He pointed out that GDP growth in 2022-23 turned out to be stronger than anticipated and is holding up well. MPC will remain vigilant and will take further policy action as and when required to keep inflation expectations anchored and bring inflation down to 4 percent," Das informed.
Since the April’23 policy review, the CPI inflation print for March-April has corrected and come in below RBI’s upper tolerance threshold of 6 percent which provided comfort to the RBI, prompting it to keep the policy rates unchanged. India’s retail inflation for April eased to an 18-month low of 4.70 percent. This was the second time India's headline inflation remained within the tolerance range of the RBI. In March, India’s headline inflation stood at 5.66 percent.
However, Das stated that the headline inflation is expected to remain above 4 percent throughout FY24.
Going ahead, Das sees easing of inflation observed across all headline inflation categories and forecast of normal monsoon augurs well for Kharif crop. He further noted that the conditions are now favourable for a pickup in capex.
On currency, he said that the Indian rupee has remained stable since January this year. Domestic demand condition remains supportive of growth; rural demand on revival path, he added. He also expects current account deficit to moderate further in Q4 but remain eminently manageable for FY24.
GDP forecast: RBI has raised GDP growth estimate for Q1FY24 and Q2FY24 while that of Q3FY24 and Q4FY24 have been reduced. Overall for FY24, growth estimate is maintained at 6.50 percent.
For Q1, GDP growth forecast has been increased to 8 percent from 7.8 percent earlier while for Q2, it has been raised to 6.5 percent from 6.2 percent earlier. Meanwhile, for Q3, RBI's GDP estimate has been reduced to 6 percent and for Q4, it has been cut to 5.7 percent from 5.9 percent earlier.
Inflation forecast: RBI has lowered the FY24 inflation projection to 5.1 percent from 5.2 percent previously. It has lowered CPI inflation forecast for Q1 and Q2 while for Q3 and Q4 estimates are maintained.
Q1 forecast is cut to 4.6 percent from 5.1 percent previously while Q2 estimate has been reduced to 2.5 percent from 5.4 percent earlier. However, Q3 and Q4 CPI forecasts have been retained at 5.4 percent and 5.2 percent, respectively.