The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5 percent for the second straight time in the June policy. The RBI MPC paused rate hike in April policy after raising it by 250 basis points (bps) since May 2022 in a bid to contain inflation.
But, since March, the retail inflation has come in below the upper level tolerance (6 percent) of the RBI, which has led it to take a pause in rate hike.
However, Governor Shaktikanta Das 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.
Still, Das believes that the headline inflation will remain above 4 percent throughout FY24.
Let's take a look at what experts make of the June policy.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services
Even though the MPC’s rate decision and stance have come on expected lines as pause and withdrawal of accommodation, respectively, the Governor’s commentary can be interpreted as positive. The central bank’s projection of FY24 CPI inflation has come at 5.1 percent, lower than 5.2 percent projected in the previous meeting. This indicates that the MPC has come to the end of this rate hiking cycle. If the monsoon is normal and the global scenario is favourable, the MPC may think about a rate cut by end of CY2023 or early 2024.
Ritika Chhabra, Quant Macro Strategist, Prabhudas Lilladher PMS
There were no surprises on policy front as we were expecting RBI to hold the rates at 6.5 percent. The central bank kept its stance unchanged to 'withdrawal of accommodation' as it maintains its focus on inflation, citing delay in monsoon, El Nino impact and geopolitical uncertainties as upside risks to inflation. We expect FY24 inflation at 4.9 percent, slightly lower than RBI's estimate of 5.1 percent, as base effect turns favorable and imported inflation eases.
Sunil Damania, Chief Investment Officer, MarketsMojo
As anticipated, the Reserve Bank of India has chosen not to increase interest rates, citing the belief that the previous 250 basis points rate hike implemented since last May has yet to fully impact the economy. The presence of global uncertainty is an additional factor influencing the RBI's cautious approach, as a rate hike could potentially hinder economic growth. Predictions indicate that inflation for the fiscal year 2024 is expected to remain above 4 percent, and fluctuations in crude oil prices, influenced by Saudi Arabia's announcement of production cuts, could further elevate inflation. The unresolved uncertainty surrounding El Nino also poses a risk of inflationary spikes. Consequently, the RBI has opted to adopt a careful stance by refraining from raising interest rates.
Anitha Rangan, Economist, Equirus
While the positive undertones in the RBI policy were from India’s resilient growth and external segment and easing inflation, there was also a lot of caution. Overall, it appears that in the current favourable balance of growth inflation dynamics with external sector being manageable, RBI does not want to disturb the balance and is using the calm as the elbow room to maintain pause. Maintaining its growth estimates at 6.5 percent and lowering inflation by 10 bp to 5.1 percent, RBI perhaps is buying time and pushing the hike as far as possible. Until then, words of caution are sufficient counter to act if necessary.
Divam Sharma, Founder, and CEO of Green Portfolio
The Governor continues to be vigilant on inflation while targeting growth. Metrics of core inflation expectations, trade deficit, the output of core industries, and a stronger rural economy outlook should support domestic consumption, credit growth, and private capex going forward. All eyes are now on the upcoming US Fed policy meeting where there is a 67 percent probability of a pause. This announcement should trigger more FPI flows into Indian equities. We anticipate a cut in repo rates over the coming months, which shall trigger a private capex demand.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS
The RBI's decision to keep policy rates unchanged was in-line with expectations. It was primarily supported by the significant drop in retail inflation in Apr '23 and the further softening of inflationary pressures expected in the coming months. We expect an extended pause on interest rates from the regulator in the near future. While the inflation is expected to hover above the tolerance limit in FY24, the RBI has marginally reduced its inflation forecast to 5.1 percent vs 5.2 percent in the previous policy.
Umesh Kumar Mehta, CIO, SAMCO MF
RBI decides to stay put in a second consecutive meeting as the Indian economy and financial sector remain resilient. Though RBI courageously preceded Fed by keeping the rates unchanged, it is highly unlikely that it would initiate easing the rate cycle before Fed.
Vinit Bolinjkar- Head of Research - Ventura Securities
The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5 percent under the liquidity adjustment facility, providing relief to retail & corporate borrower segments. This decision aims to sustain the strong housing sales momentum seen in 2023, with over 1.14 lakh units sold in the first quarter across the top 7 cities. With the unchanged rates, the outlook remains favorable for first-time homebuyers, as interest rates from most banks & NBFCs will likely stay in single digits, currently ranging from 8.7 percent to 9.65 percent.
Robust credit growth, indicating increased lending by banks, can provide the necessary financial support for investment and consumption. When credit availability is high, businesses and individuals have greater access to funds, facilitating investment and spending.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
We appreciate the decision of the RBI to maintain the Repo rate unchanged for the second consecutive time. Although inflation still remains higher than the tolerance level, it has decreased over the last few months, allowing the RBI to maintain its stance.
The decision to pause is well justified, as the inflation outlook for FY24 is within the central bank's tolerance range. However, the momentum in key macro-indicators related to growth is uneven. Indicators such as GST collection, manufacturing and services PMI, and E-way bills suggest strength in economic growth. However, certain crucial growth indicators, particularly consumer durable goods in the IIP (Index of Industrial Production), which reflects household consumption, have yet to show sustained recovery. Therefore, maintaining the policy rates unchanged for a while will support consumer demand amid diminishing inflation, thereby fostering economic growth, he added.