MPC Keeps Repo Rate unchanged but Changes Stance
On 9th September 2024, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) announced its Monetary Policy Statement. The MPC has decided to keep its interest rate unchanged for the Tenth time (10th) in a row. Let us see the MPC statement now.
Monetary Policy Statement, October 2024
MPC, after evaluating the current and evolving macroeconomic situation decided to keep the policy Repo Rate (i.e. policy interest rate) under the liquidity adjustment facility (LAF) kept unchanged at 6.50%.
Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25% and the Marginal Standing Facility remains at 6.75%.
The MPC decided to change its monetary policy stance. It has changed its stance to ‘neutral’ while remaining focused on a long-term alignment of inflation with the target, which stimulates growth.
MPC on Gross Domestic Product (GDP)
The global economy has shown resilience and is expected to continue to grow steadily for the rest of the year, despite downside risks from escalating geopolitical tensions. The real gross domestic product (GDP) of India increased by 6.7% in Q1 2024–2025 due to both investment and private consumption.
The agriculture sector is expected to fare well moving forward due to above-average rainfall and healthy reservoir levels while manufacturing and service sector activity is expected to remain stable.
Healthy kharif sowing and continued consumer spending momentum during the festival season bode well for private consumption on the demand side. The confidence of businesses and consumers has increased. Strong growth in non-food bank credit, high capacity utilisation, strong bank and corporate balance sheets, and the government’s ongoing emphasis on infrastructure spending all support the investment outlook. The improving global trade volumes are expected to boost external demand.
Considering all these factors, MPC estimates the real GDP growth for 2024-25 at 7.2%; with Q2 at 7.0%; Q3 at 7.4%; and Q4 at 7.4%. For Q1:2025-26, real GDP growth is estimated to be 7.3%. (Chart 1). MPC stated, “The risks are evenly balanced”.
MPC on Inflation
MPC stated that headline inflation fell significantly from 5.1% in June to 3.6% in July and 3.7% in August. The September inflation may witness a significant increase as base effects become unfavourable and result in an upturn in food prices.
MPC expects food inflation to ease by Q4: 2024-25 on improved Kharif arrivals and an increasing outlook for a good Rabi season. Important kharif crops sown larger than last year and the long-term average. There is enough cereal buffer reserve to ensure food security. Appropriate reservoir levels, a good winter, and optimal soil moisture conditions are favourable for the upcoming Rabi season, even though adverse weather events remain a risk.
Enterprise surveys conducted by the Reserve Bank reveal that companies anticipate a reduction in input cost pressures; nevertheless, it is imperative to monitor closely the recent surge in important commodity prices, particularly metals and crude oil. After taking into account all these variables, the CPI inflation is estimated at 4.5% for 2024–2025, with quarterly estimates of 4.1% in Q2, 4.8% in Q3, and 4.2% in Q4. The estimated CPI inflation for Q1:2025-26 is 4.3%. (Chart 2). It also stated that “the risks are evenly balanced”.
MPC keeps Repo Rate unchanged but changes Stance
The MPC stated that private consumption and investment, two domestic drivers, continue to support the outlook for domestic growth. This gives monetary policy more leeway to concentrate on achieving a stable alignment with the inflation target. The MPC reiterates that persistent price stability strengthens a sustained period of strong growth.
MPC has projected that there will be a spike in headline inflation for a brief time soon and is expected to moderate later. There is now more optimism over the disinflation path later in the fiscal year thanks to improved prospects for the Rabi and Kharif crops as well as significant buffer stockpiles of food grains.
The MPC made the decision, in light of the current and anticipated inflation-growth dynamics that are well-balanced, to change from a withdrawal of accommodation to a “neutral” monetary policy stance, keeping a clear focus on a sustained alignment of inflation with the target while supporting growth. The shift in position gives the MPC flexibility while allowing it to keep an eye on the unfinished process of disinflation.
On the risk side, uncertainties about increased global geopolitical risks, volatile financial markets, adverse weather patterns, and the recent spike in Global food and metal prices are the main sources of risk.
The MPC must therefore continue to monitor the changing inflation forecast. In light of these, the MPC decided to maintain the policy repo rate unchanged at 6.50% in this meeting.
Out of six (6) members of the MPC, five (5) members have voted to keep the policy repo rate unchanged and one (1) member voted to reduce the policy repo rate by 25 basis points.
All six (6) members voted for a change in stance from the withdrawal of accommodation to ‘neutral’ and to remain clearly focused on the long-term alignment of inflation with the target, while supporting growth.
Creation of the Reserve Bank Climate Risk Information System (RB-CRIS)
Global financial systems are increasingly at risk from climate change. Consequently, it is necessary for regulated organizations to conduct comprehensive evaluations of climate-related risks, occasionally facing obstacles due to insufficient data. To bridge these data gaps, the Reserve Bank proposes to create a data repository, namely, the Reserve Bank – Climate Risk Information System (RB-CRIS).
UPI – Enhancement of Limits
UPI transformed India’s financial landscape due to its constant innovation, making digital payment accessible and inclusive. To encourage wider adoption of UPI and make it more inclusive, it has been decided to (i) enhance the per-transaction limit in UPI123Pay from ₹5000 to ₹10,000, and (ii) increase the UPI Lite wallet limit from ₹500 to ₹1,000.
Introduction of Beneficiary Account Name Look-up Facility
Currently, before completing a payment transaction, the remitter of funds can confirm the beneficiary’s identity using UPI and the Immediate Payment Service (IMPS). A proposal has been put forward to incorporate this functionality into the NEFT and RTGS system. With the use of this feature, the remitter will be able to confirm the account holder’s identity before transferring money to them via RTGS or NEFT. Additionally, this will lessen the likelihood of fraud and incorrect credit.
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.
The key interest rate of RBI has remained unchanged for Tenth (10th) consecutive times. 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 RBI’s stance has changed from withdrawal to neutral, RBI’s stance shows that there is still a greater concern around the economy like increasing food inflation, volatile financial markets, and geopolitical tensions.
We do not expect a decrease in overall inflation in the next few quarters. This is worrisome for consumers and investors.
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