MPC Keeps Policy Repo rate unchanged
On 8th August 2024, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its Monetary Policy Statement. This is the 50th meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) since its inception in September 2016. – the first meeting was held on October 3-4, 2016.
In its 50th Meeting, the MPC has decided to keep its interest rate unchanged for the ninth time (9th) in a row. Let us see the MPC statement now.
Monetary Policy Statement, August, 2024
MPC, after assessing the current and developing macroeconomic situation decided to keep the policy Repo Rate (i.e. policy interest rate) unchanged at 6.50 percent.
Subsequently, the Standing Deposit Facility (SDF) rate remains at 6.25 percent and the Marginal Standing Facility remains at 6.75 percent.
The MPC maintains its focus 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 economic activity continues to sustain its momentum. MPC considers that the high-frequency indicators of investment activity, such as a strong expansion in steel consumption, healthy balance sheets of banks and corporates, high-capacity utilisation, and government push on infrastructure spending, indicate a robust outlook. It also stated that improving world trade prospects could support external demand.
On the risks side, geopolitical tensions, geoeconomic fragmentation, and international commodity price volatility are taken into consideration.
Considering all these factors, MPC estimated that the real GDP growth for 2024-25 to grow at 7.2% with the first quarter (Q1) to grow at 7.1% (revised from June’s projection of 7.3%); Q2 at 7.2%; Q3 at 7.3%; and Q4 at 7.2%. Real GDP growth for Q1:2025-26 is projected at 7.2% (Chart 1). MPC stated that “the risks are evenly balanced”.
MPC on Inflation
MPC stated that the headline inflation had moderated from its peak. But it happened unevenly. Food price momentum has remained high in July in Q2 2024-25. Inflation is expected to gradually increase in Q3 – thanks to diminishing base effects.
MPC kept the inflation estimate unchanged for 2024-25. The CPI inflation estimation for the FY 2024-25 remained the same (as estimated in April and June MPC Statement) at 4.5 percent with Q2 at 4.4% (revised higher from 3.8% in June); Q3 at 4.7% (marginally higher than June’s estimation of 4.6%); and Q4 at 4.3% (lesser than an estimation of 4.5% in June). CPI for the Q1 2025-26 is estimated at 4.4% (chart 2). This estimation is with an assumption of a normal monsoon year. It also stated that “the risks are evenly balanced”.
MPC Stance
MPC expects domestic growth supported by investment demand, increasing rural consumption and steady urban consumption. The unstable and persistently high food price inflation may hurt inflation expectations and have spillovers to core inflation.
The MPC is determined to its commitment to align to the 4% target on a durable basis. Considering these circumstances, the MPC decided to keep the policy repo rate unchanged at 6.50% in this meeting.
It also reiterated the need to continue with a disinflationary stance until the headline CPI inflation reaches its target on a durable basis. The MPC believes that durable price stability would lay strong foundations for a period of high growth. 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 (6) members of the MPC, Four (4) members have voted to keep the policy repo rate unchanged and two (2) members voted to reduce the policy repo rate by 25 basis points.
Four (4) members voted for the withdrawal of accommodation to ensure that inflation progressively aligns with the target with supporting growth and two (2) members voted for a change to a neutral stance.
Introducing Delegated Payments through UPI
The RBI has proposed to introduce “Delegated Payments” in UPI.
A primary user (an individual) could designate a secondary user’s (another individual) UPI transaction limit on the primary user’s bank account through “Delegated Payments.”
Detailed instructions on this product will be issued sooner, and this product is expected to add to the reach as well as usage of digital payments across the country.
My Perspective and Takeaways
The MPC statement clearly shows that RBI is committed to its inflation target of 4%, and it aims to maintain a deflationary trajectory until inflation reaches its target.
This is the ninth (9th) time in a row RBI has kept its key interest rate unchanged. RBI has untouched the repo rate since February 2023. Food inflation remains a greater concern and a big hurdle for the descent of overall inflation.
Though many economists/analysts expected that there would be a change in RBI’s stance from withdrawal to neutral, the RBI stance shows that there is still a greater concern around the economy like increasing food inflation, surging services inflation globally, and geopolitical tensions.
We do not see a descent in overall inflation in upcoming quarters. This is worrisome for consumers and investors.
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