RBI keeps repo rate unchanged at 6.5%, says waiting for inflation ‘elephant’ to walk away

The RBI last cut the repo rate by 40 basis points to 4 per cent in May 2020 when the Covid pandemic raged across the country affecting the entire economy, leading to slowdown in demand, production cuts and job losses. Since then, the RBI has hiked the repo rate by 250 points to 6.50 per cent in order to tackle high inflation level after the epidemic subsided.

The central bank retained the FY25 projections for real GDP (gross domestic growth) at 7 per cent and consumer price-based inflation (CPI) at 4.5 per cent. The RBI’s real GDP growth estimate for FY25 is lower than the National Statistical Office’s (NSO) projection of 7.6 per cent in FY2024. In the interim Budget for 2024-25, the government said the nominal GDP – without excluding the pace of inflation — is likely to grow at 10.5 per cent.

The RBI has projected an inflation of 4.9 per cent in Q1, 3.8 per cent in Q2, 4.6 per cent in Q3 and 4.5 per cent in Q4 of FY25.

“Two years ago, around this time, when retail inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” RBI Governor Shaktikanta Das said after unveiling the monetary policy on Friday.

Analysts expect the RBI to cut the repo rate when retail inflation comes below the four per cent level. The timing and extent of rate cuts remain dependent on announcement by global central banks and the retail inflation aligning with the RBI’s 4 per cent target on a sustained basis.

“Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4 per cent. As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation,” Das said.

Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions, he said.

The decision to keep the repo rate steady was taken in a 5:1 majority. This will provide relief to home, vehicle, personal and other loan borrowers as their equated monthly instalments (EMI) will not rise. The rate-setting panel also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

Das underlined that while inflation has come down significantly, it remained above the 4 per cent target. Food inflation continues to exhibit considerable volatility impeding the ongoing disinflation process. The government has mandated the RBI to keep CPI inflation, or retail inflation, at 4 per cent with a band of +/- 2 per cent. The Governor said it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. “Till this is achieved, our task remains unfinished,” he said.

In February, CPI inflation print stood at 5.09 per cent compared to 5.1 per cent in January. On growth, the Governor said the outlook for agriculture and rural activity appears bright, with good rabi wheat crop and improved prospects of kharif crops, due to expected normal south-west monsoon. With rural demand catching up, consumption is expected to support economic growth in 2024-25. Urban consumption has stayed buoyant.

He said strengthening of rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in the manufacturing and services sector should boost private consumption.

“The prospects of investment activity remain bright owing to an upturn in the private capex cycle becoming steadily broad-based; persisting and robust government capital expenditure; healthy balance sheets of banks and corporates; rising capacity utilisation; and strengthening business optimism as reflected in our surveys,” he said. However, headwinds from protracted geopolitical tensions and increasing disruptions in trade routes pose risks to the outlook, Das said.

The real GDP growth for 2024-25 has been projected at 7 per cent, with Q1 at 7.1 per cent; Q2 at 6.9 per cent; and Q3 and Q4 each at 7 per cent.

The RBI Governor said the central bank will remain nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo. The RBI will deploy mix of instruments to ensure that money market interest rates evolve in an orderly manner that preserves financial stability.

On the rupee, Das said the local currency remained largely range-bound as compared to both its emerging market peers and a few advanced economies during 2023-24. The domestic currency was the most stable among major currencies in FY24, reflecting India’s sound macroeconomic fundamentals, financial stability and improvements in the external position.

Commenting on the RBI policy, State Bank of India’s Chairman Dinesh Khara said, “Tracking the market expectation of the status quo, the monetary policy statement is an affirmation of goldilocks for India with high growth and low inflation in FY25 and FY26.” Consumers’ confidence in urban households continues to improve, while rural demand remains upbeat, Khara said.

HDFC Bank’s Chief Economist and Executive Vice President Abheek Barua said that given the recent global resilience in economic activity, there has been a tendency to keep monetary policy tight to take on the last mile challenge on inflation by global central banks, and the RBI seems to be moving in lock step with that.