InTrest Rate Unchanged and Focuses on Withdrawal of Accommodation
On 10th February 2024, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. MPC keeps interest rate unchanged. Let us see the MPC statement now.
Interest Rate Unchanged – Monetary Policy Statement,February, 2024
MPC has kept the policy interest rate (i.e. Repo Rate) unchanged at 6.50 percent.
As a result the Standing Deposit Facility (SDF) rate remains at 6.25 percent and the Marginal Standing Facility remains at 6.75 percent.
The MPC keeps an eye on the withdrawal of accommodation to ensure that inflation aligns with the target gradually and supports growth.
MPC on Gross Domestic Product (GDP) Estimates
MPC stated that the Domestic Economy is strengthening. It also observed that as per the National Statistical Office (NSO)’s First Advance Estimates, due to strong investment activity, the real GDP is estimated to grow by 7.3 percent Year-on-Year (Y-o-Y) in 2023-24. On the Supply Side, Gross Value added (GVA) increased by 6.9 percent in 2023-24 as it is mainly driven by the manufacturing and services sector.
MPC considered all these factors – including agricultural crop production, household consumption, imports, banks and business balance sheets, improved business sentiments and Governments’ Capital Expenditure – before it went for GDP growth projection for 2024-25.
It also considered that the net external demand will be supported by the growing supply chain integration, and improving prospects for global trade. On the risks side, geopolitical tensions, geoeconomic fragmentation and international financial market volatility are taken into consideration.
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Source: RBI MPC statment
MPC estimated that the real GDP growth for 2024-25 to growth at 7.0 percent with first quarter (Q1) to grow at 7.2 percent; Q2 at 6.8 percent; Q3 at 7.0 per cent; and Q4 at 6.9 per cent (Chart 1). MPC stated that “the risks are evenly balanced”.
MPC on Inflation
MPC stated that from its October, 2023 CPI headline Inflation increased consecutively to 5.7 per cent for the next two months till December, 2023.
This increase is due to Food inflation primarily an increase in the prices of vegetables, a decline in the prices of fuel and a reduction in core inflation (i.e. CPI inflation minus/excluding food & Fuel prices). Core Inflation was softened at 3.8 percent in December – this is four years low.
Source: RBI MPC statment
MPC estimated that, for 2023-24, the inflation will be at 5.4 percent with Q4 at 5.0 percent. In 2024-25, CPI inflation is estimated at 4.5 percent with Q1 at 5.0 percent, Q2 at 4.0 per cent; Q3 at 4.6 per cent; and Q4 at 4.7 per cent, it is with an assumption of a normal monsoon year. It also stated that “the risks are evenly balanced”.
MPC Stance
The Momentum in investment demand, positive business sentiments and rising consumer confidence are supporting the domestic economic activity to hold up well, says MPC. Significant and recurring food price shocks are slowing down disinflation – which is driven by the moderation of core inflation. One of the main reasons for upside risks to inflation are geopolitical events and their impact on supply chains along with volatility in commodity prices and global financial markets.
The economy is still working on the effect of repo rate increases. The MPC is closely monitoring all signs of generalisation of food price pressures to non-food prices which can squander away the gains in the easing of core inflation.
The MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting to keep the path of disinflation to sustain. To ensure the anchoring of inflation expectations and complete transmission, the monetary policy must continue its actively disinflationary pursuits.
The MPC is determined to bring inflation to target and will remain firm. The MPC also chose to remain focused on the withdrawal of accommodation to support growth and to ensure inflation gradually reaches its target.
Out of Six members of MPC, Five (5) members have voted for keeping the policy repo rate unchanged and one (1) member voted for the reduction of the repo rate.
Five (5) members voted for withdrawal of accommodation and one (1) member voted for a change to a neutral stance.
Introduction of Programmability and Offline Functionality in Central Bank Digital Currency (CBDC) Pilot
RBI Governor has announced that the CBDC Retail (CBDC-R) pilot currently enables Person to Person (P2P) and Person to Merchant (P2M) transactions. He also stated that “It is now proposed to enable additional functionalities of programmability and offline capability in CBDC retail payments. Programmability will facilitate transactions for specific/targeted purposes, while offline functionality will enable these transactions in areas with poor or limited internet connectivity.”
My Perspective and Takeaways
Given the prevailing economic and global situations, it seems to be a more realistic projection of GDP growth at 7 percent. It’s good to hear from MPC after a long time that the focus is not only on inflation but also on supporting growth. However, downside risks are equally high, which is where the policy framework plays a vital role in avoiding these risks.
Deflationary Trajectory remains the primary aim for RBI till Inflation reaches its target of 4 percent. RBI is also vigilant on core inflation. This is the Sixth time in a row RBI has paused the key interest rate.
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