The Reserve Bank of India (RBI) kept the repo rate unchanged at 6.5 percent for the third straight meeting in the August policy despite the recent rise in inflation. Reserve Bank governor Shaktikanta Das-headed Monetary Policy Committee (MPC) met on August 8, 9, and 10 for this review. This comes amid a sharp spike in vegetable prices, a spatially uneven monsoon, and a divergent global monetary policy cycle.
The MPC voted unanimously to keep the repo rate unchanged. It decided to take a pause in April for the first time after consecutive rate hikes in 6 previous policies.
The central bank has already increased the repo rate by a total of 250 basis points since May 2022 in a bid to contain inflation. This was the third time that the RBI has kept the rate unchanged.
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 also remain unchanged at 6.25 percent and the marginal standing facility (MSF) and bank rates also remain unchanged at 6.75 percent.
RBI Governor Shaktikanta Das, in his monetary policy speech, said that he is happy to see the Indian economy continuing to grow at a reasonable pace. India’s strong fundamentals have laid the foundations of sustainable growth and can become the new growth engine for the world, added the Governor.
"Cumulative rate hike of 250 bps from FY23 is working its way through the economy. MPC remains resolute in its commitment to align inflation with the 4 percent target and anchor inflation expectations. Global economy continues to face daunting challenges," Das noted.
A number of economies have demonstrated remarkable resilience and the grim prospect of a hard landing is easing, said Das, adding that globally, policy rates could stay higher for longer.
He further pointed out that uncertainty remains on food prices due to El Nino in August and beyond, however, vegetable prices may see a significant correction after a few months. The momentum of overall economic activity in India continues to be positive, he added.
The governor also highlighted that Indian banks have been healthiest in a decade and that the Indian economy exudes enhanced strength and stability.
Inflation forecast: RBI has raised the FY24 inflation projection to 5.4 percent from 5.1 percent previously amid increasing food prices. It has also raised the CPI inflation forecast for Q2 and Q3 while for Q4 estimates are maintained.
The Q2 forecast has been raised to 6.2 percent from 5.2 percent previously while the Q3 estimate has been advanced to 5.7 percent from 5.4 percent earlier. However, the Q4 CPI forecast has been retained at 5.2 percent. CPI forecast for Q1FY25 has also been set at 5.2 percent.
GDP forecast: RBI has maintained its FY24 GDP growth estimate at 6.5 percent. For all 4 quarters if FY24, the central bank has retained its estimates.
For Q1, the GDP growth forecast has been maintained at 8 percent while for Q2, Q3, and Q4, it has been retained at 6.5 percent, 6 percent, and 5.7 percent. For Q1FY25, GDP growth forecast has been pegged at 6.6 percent.
Measures
In a measure to absorb surplus liquidity, the Governor announced that banks shall maintain an incremental cash reserve ratio (CRR) of 10 percent on an increase in their NDTL between May 19 and July 28. This will be in effect from August 12.
"This measure is intended to absorb the excess liquidity generated due to withdrawal of ₹2000 banknotes, etc, and is a purely temporary measure. There will remain adequate liquidity in the banking system despite the move. This decision will be reviewed on September 8 or even earlier," he said. Meanwhile, the existing CRR remains unchanged.
He also proposed to put in place a transparent framework for the resetting of interest rates of EMI installments based on floating rates. The framework will require clear communication, and options to switch to fixed rates or foreclosure of loans, among other things. These measures will further strengthen consumer protection.
Thirdly, the Governor proposed to enable conversational payments in UPI by introducing offline payments for ₹200-500 in UPI using near-field tech via UPI Lite.
