MPC meeting: RBI leaves repo rate unchanged at 6.5%

The rate-setting panel, while retaining FY2024 consumer price index (CPI) based inflation projection at 5.4 per cent, revised upwards its inflation forecast for the second quarter of current fiscal to 6.4 per cent, from 6.2 per cent announced in the August policy. The inflation forecast for the third quarter has been revised to 5.6 per cent, from 5.7 per cent, while the fourth quarter projection has been retained at 5.2 per cent.

The RBI kept the real GDP growth projection for FY2024 unchanged at 6.5 per cent but raised concerns over geopolitical tensions, global economic slowdown and uneven monsoon.

“The overall inflation outlook is clouded by uncertainties, from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices. The MPC observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation,” RBI Governor Shaktikanta Das said while announcing the monetary policy.

In August, CPI inflation eased to 6.83 per cent from 7.44 per cent in July. Das expects inflation to ease further in September on the back of moderation in food prices.

He said the MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations.

“I would like to emphatically reiterate that our inflation target is 4 per cent and not 2 to 6 per cent. Our aim is to align inflation to the target on a durable basis, while supporting growth,” Das emphasised.

Under the flexible inflation targeting (FIT) framework, the RBI is expected to maintain CPI inflation, or retail inflation, at 4 per cent with a band of +/-2 per cent.

Das said that core inflation, which is CPI excluding food and fuel, softened to 4.9 per cent during July-August 2023 and is a silver lining.

The six-member MPC, in a majority of 5:1, also kept the monetary policy stance as ‘withdrawal of accommodation’ as the transmission of the 250 basis points (bps) (since March 2022) increase in the policy repo rate to bank lending and deposit rates is still incomplete. One basis point is one-hundredth of a percentage point.

The weighted average domestic term deposit rate (WADTDR) on fresh deposits of scheduled commercial banks and the weighted average lending rate (WALR) on fresh loans have increased by 233 bps and 196 bps respectively in the current tightening cycle. The corresponding increase in outstanding term deposit rates and outstanding lending rates is even lower at 157 bps and 112 bps, respectively.

To a question on whether a change in policy stance to neutral could signal a dilution of the RBI’s resolve to act on inflation, Das said a change in stance will be on the table when the situation is conducive.

“At the moment, the rate hike is still incomplete. We have increased the repo rate by 250 basis points but it has not fully translated either to deposit rates or the lending rates of the bank. There is still some distance to be covered. So we would expect that (transmission) to align with the increase in the repo rate. Therefore, the stance remains withdrawal of accommodation,” he said.

On growth, Das said in contrast to global trends, domestic economic activity exhibits resilience on the back of strong domestic demand. The country’s real GDP growth stood at 7.8 per cent in the first quarter of FY2024.

On the demand front, steady expansion is seen in urban consumption while rural demand is showing signs of revival.

Looking ahead, domestic demand conditions are likely to benefit from sustained buoyancy in services, consumer and business optimism, government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalisation, he said.

“Headwinds from geopolitical tensions and geo-economic fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon, however, pose risks to the outlook,” he said.

The RBI also said it will conduct OMO-sales (Open Market Operation sales) of government securities to manage liquidity, consistent with the stance of monetary policy. “The timing and quantum of such operations will depend on the evolving liquidity conditions,” Das said.

This announcement resulted in the 10-year benchmark — 7.18%-2033 — yield to rise to 7.34 per cent at close of Friday from a previous close of 7.22 per cent.

Das said the RBI OMO sales is part of the overall domestic liquidity management. “With regard to the (OMO sales) calendar, we will watch the evolving trends. There are several moving parts in the liquidity scenario. We will watch the evolving trends and we will notify as and when it becomes necessary,” Das said, when asked whether there will be a calendar for OMO sales.

He also urged banks with surplus funds to lend in the interbank call market for better returns instead of passively parking in the SDF (standing deposit facility scheme). An SDF is an additional tool for absorbing liquidity without any collateral. Under SDF, banks can place deposits with the RBI on an overnight basis and earn interest.

Commenting on the RBI policy, State Bank of India’s (SBI) Chairman Dinesh Khara said, “The ability of RBI to remain steadfast and focused on pitching key growth deliverables bodes well even as global uncertainties pick pace outside. The decision to calibrate liquidity will depend much on evolving scenario.”