Why has the RBI policy panel kept interest rates unchanged for the 9th time in a row?

The RBI also kept the gross domestic product (GDP) growth projection for FY2025 unchanged at 7.2% and the retail inflation forecast at 4.5% despite the sticky food inflation.

Why did the MPC decide to keep the policy rate unchanged?

The six-member MPC retained the Repo rate (which is the rate at which the RBI lends money to banks to meet their short-term funding needs) by a 4-2 majority decision.

The RBI has been raising concerns over elevated food inflation over the past many months, as it could derail the disinflation path. Headline inflation, as measured by year-on-year (y-o-y) changes in the all-India consumer price index (CPI), edged up to 5.1% in June from 4.8% in May. The increase in the inflation rate is attributed to food inflation, which firmed up to 8.4% in June compared to 7.9% in the previous month. “Food component of retail inflation remains stubborn… food inflation contributed around 70 per cent of the overall retail inflation,” RBI Governor Shaktikanta Das said during Thursday’s briefing on the policy.

“High growth can’t be achieved without price stability,” Das said. “MPC has to remain vigilant to prevent spillovers or second-round effects from persisting food inflation and preserve the gains made so far in monetary policy credibility,” he said.

Under the flexible inflation targeting regime, the RBI has to maintain CPI in the 2-6% range. It has been aiming to bring inflation down to 4% on a durable basis.

In a report, the global investment banking and asset management firm Goldman Sachs said: “Going forward, even though a high base last year is going to pull headline inflation down towards 4% in Q3, there are upside risks to food inflation due to an uneven monsoon.”

Shishir Baijal, Chairman and Managing Director of the real estate consultancy Knight Frank India, said: “While core inflation has moderated to a more manageable level, volatile food prices continue to drive headline inflation higher. The uneven monsoon could further push up food prices, and inflationary pressures might also arise from geopolitical uncertainties and the depreciation of the rupee amid global economic fluctuations.”

What will happen to lending rates?

With the RBI leaving the Repo rate at 6.5%, all external benchmark lending rates (EBLR) that are linked to the repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) on home and personal loans will not increase. (Home loans are linked to EBLR.)

However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250-basis-point hike in the repo rate between May 2022 and February 2023 has not happened. In response to the 250-bps policy rate hike since May 2022, banks have revised their repo-linked EBLRs upward. The 1-year median marginal cost of funds-based rate (MCLR) of banks increased to 168 bps during the period May 2022-June 2024.

Bankers expect the deposit rate in certain buckets to marginally go up in the system, as credit growth has lagged behind deposit growth in the last couple of months.

When is RBI expected to cut the Repo rate?

Some economists expect the RBI to deliver the first cut in the Repo rate only in December 2024. The next meeting of the MPC is scheduled to be held between October 7 and 9.

“We believe that the nearest possibility of a rate cut is December 2024,” Bank of Baroda’s Economist Aditi Gupta said. She said RBI is likely to monitor incoming data, and will continue to exercise caution before deciding on cutting rates.

Aditi Nayar, Chief Economist and Head of Research and Outreach at credit rating agency ICRA, said that if the food inflation outlook turns favourable on the back of a normal distribution of rains in the second half of the monsoon season, and in the absence of global or domestic shocks, a stance change is possible in October 2024. “This could be followed by a 25-bps rate cut each in December 2024 and February 2025, with an extended pause thereafter,” Nayar said.

The RBI could use this policy to set the stage for an eventual rate cut later this year. “If this were to happen, we could see further down moves in bond yields with the 10-year yield moving towards 6.80% levels,” HDFC Bank said in a report.

Will global events impact India’s policy?

The rapid movements in global markets in recent days were due to several catalysts — tensions in the Middle East, the surge in the Japanese yen and the subsequent unwinding of carry trades globally, and worries around an imminent US recession.

“Expectations of a rate cut by the US Federal Reserve have increased significantly over the last few weeks, with calls for a 50-bps rate cut as early as September and cumulative rate cuts of 115 bps expected in 2024. While some of these expectations do seem overstretched at this stage, we do see a high chance of the Fed starting its rate cut cycle in September — delivering a cut of 25 bps. This could have implications for the rupee and the RBI could start aligning its monetary policy with the global rate cycle to reduce any significant future policy deviations,” HDFC Bank said.

An HSBC report said: “While our US economists are not convinced that a US recession is imminent, softening labour market conditions have boosted the likelihood of more Fed rate cuts.” HSBC said it expected three 25-bps cuts in 2024 (over the September, November and December meetings), even as the potential for a larger 50 bps cut in September has increased. This is expected to be followed by 75 bps of further rate cuts in 2025, HSBC said.