In line with market expectations, the Reserve Bank of India (RBI) maintained its benchmark interest rate (repo rate) at 6.5% during its fourth bi-monthly policy announcement for the financial year 2023–24, following a 3-day meeting. Standing Deposit Facility and Marginal Standing Facility rates are also left unchanged at 6.25% and 6.75%, respectively.
"The MPC also decided by a majority of five out of six members to remain focused on the ‘Withdrawal of Accommodation’ to ensure that inflation progressively aligns with the target while supporting growth," said RBI Governor Shaktikanta Das.
"On a positive note, interest rates haven't increased as anticipated; however, they are expected to remain elevated for an extended period. This will have an implication on rate-sensitive sectors like banking, auto, core industries, and heavy-weighted balance sheet companies," said Vinod Nair, Head of Research at Geojit Financial Services.
The RBI has made some adjustments to its CPI inflation projections. For Q2FY24, the projection has been revised upward to 6.4% from the previous estimate of 6.2%. In contrast, for Q3FY24, the projection has been slightly lowered to 5.6% from 5.7%. The forecast for Q4FY24 remains unchanged at 5.2%.
Looking ahead to the first quarter of the fiscal year 2024–25, the RBI maintains its inflation forecast at 5.2%. Notably, core inflation has decreased by 140 basis points since its peak in January.
The recent sharp drop in crude oil prices after a prolonged surge came as a relief, especially for a country like India, which depends on imports for more than 85% of its oil requirements.
During the month of August, retail inflation eased to 6.83% from 7.44% in July, which was the highest since April 2022 and below market forecasts of 7%. However, inflation remains well above the 4% midpoint of the RBI’s target range.
The rise in inflation can be attributed to several factors. Firstly, the monsoon season experienced below-normal rainfall due to the El Nino phenomenon, which adversely affected agricultural production and subsequently led to a rise in food prices, particularly for vegetables.
To counter this, the government intervened by providing subsidies on vegetable prices and imposing export bans on certain cereals like sugar and rice. These measures were taken to stabilise prices and ensure sufficient food supply in the domestic market.
During the first bi-monthly policy in April, the RBI made a surprising decision to keep its benchmark rate unchanged at 6.5% after delivering six consecutive hikes that began in May last year and continued till February this year, pushing the repo rate to 6.5% with a 250-basis point hike.
Similarly, during the second and third bi-monthly policy in June and August, the RBI maintained its benchmark rate at 6.5%.
In response to the RBI's decision to maintain the status quo, the equity markets showed a positive reaction. Both benchmark indices, the Nifty 50 and Sensex, experienced marginal gains of 0.30% and 0.29%, respectively.
Among the sectoral indices, the Nifty PSU Bank rose by 0.88%, Nifty Realty gained 0.85%, Nifty Pharma and Nifty Metal increased by 0.8% and 0.58%, respectively.
Earlier, the US Federal Reserve, during its September 2023 meeting, kept its benchmark interest rate unchanged at 5.25%–5.5%. However, it hinted at the possibility of yet another rate hike later in the year.
This decision reflects the Fed's belief that it has room to carefully assess the impact of the 11 rate hikes implemented since March 2022 in its battle against inflation before making further adjustments.
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