RBI Keeps Repo rate unchanged
On 7th April, 2024 the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), has announced its Monetary Policy Statement. MPC has kept its interest rate unchanged. Let us see the MPC statement in detail now
Monetary Policy Statement, June, 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 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 high frequency indicators of domestic activity are showing resilience in 2024-25. It stated that according provisional estimates released by the National Statistical Office (NSO) on May 31, 2024, Real GDP growth for 2023-24 was placed at 8.2 per cent. In fourth quarter (Q4), the real GDP increased by 7.8% as against 8.6% in the third quarter (Q3) .
MPC also noted that on the Supply Side, Gross Value added (GVA) increased by 6.3% in Q4 of 2023-24. Real GVA growth is recorded of 7.2% in 2023-24 (for the whole fiscal year).
MPC considered all these factors – including agricultural crop production, sustained momentum in manufacturing and services activity, revival of private consumption, invesmtents, banks and business balance sheets, improved business sentiments and Governments’ Capital Expenditure – before they went for GDP growth projection for 2024-25.
On the risks side, geopolitical tensions, geoeconomic fragmentation, and international financial market volatility, are taken into consideration.
MPC estimated that the real GDP growth for 2024-25 to grow at 7.2% with the first quarter (Q1) to grow at 7.3%; Q2 at 7.2%; Q3 at 7.3%; and Q4 at 7.2% (Chart 1). MPC stated that “the risks are evenly balanced”.
MPC on Inflation
MPC stated that the headline inflation has witnessed sequential moderation though in a narrow range of 5.1% in February 2024, to 4.8% in April,2024. However, Food inflation remains high mainly due to inflation pressures in vegetables, pulses, cereals, and spices.
Deflation in fuel prices was witnessed during March-April, 2024, due to the cut in Liquified Petroleum Gas (LPG) prices. Core inflation (CPI minus food & Fuel) reduced further to 3.2% in April – lowest in the current CPI series, with core services inflation also falling to historic lows.
MPC kept the inflation estimate unchanged for 2024-25. The CPI inflation is estimation is remained the same (as estimated in April MPC Statement) at 4.5 percent with Q1 at 4.9%, Q2 at 3.8% per cent; Q3 at 4.6%; and Q4 at 4.5%, it is with an assumption of a normal monsoon year. It also stated that “the risks are evenly balanced”.
MPC Stance – Repo Rate Unchanged
The MPC observed that since its previous meeting in April, 2024, the domestic-inflation balance has shifted favourably. The domestic economic activity remains resilent supported by domestic demand, investment demand is gaining momentum and also private consumption is exhibiting signs of revival, says MPC. The path of disinflation is disrupted by volatile and elevated food inflation due ot adverse weather events. – this is posing challenges for the ultimate descent of inflation to the inflation target.
However, MPC expects that inflation may temporarily fall below the target during Q2:2024-24, due to favourable base effect, before increasing afterwards. Monetary policy has to be watchful of spillovers from food price pressures to core inflation and inflation expectations, before the final descent of inflation to the target and its anchoring.
The MPC decided to keep the policy repo rate unchanged (i.e. 6.50%) in this meeting to keep the path of disinflation to sustain till inflation reaches the 4% target on a durable basis. The MPC reiterated the need to continue with disinflationary stance until the headline CPI inflation reaches its target on a durable basis.
The MPC is determined to bring inflation to target and will remain firm. 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 members of MPC, Four (4) members have voted for keeping 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 withdrawal of accommodation to ensure that inflation progressively aligns to the target with supporting growth and two (2) members voted for a change to a neutral stance.
Introducing auto-replenishment of UPI Lite wallet – Inclusion under the e-mandate framework
Customers can load up to ₹2000 into their UPI Lite wallets and make payments up to ₹500 from these wallets using the UPI Lite service. It is suggested to bring UPI Lite under the purview of the e-mandate framework by introducing an auto-replenishment facility for the customer to load the UPI Lite wallet if the balance falls below a threshold amount set by him/her. This will allow customers to use UPI Lite seamlessly and is based on feedback from various stakeholders. The idea is to do away with the need for extra authentication or pre-debit notification because the money stays with the consumer (moving from his/her account to wallet). RBI will be releasing the related guidelines soon about the same.
My Perspective and Takeaways
From the MPC statement it is clearly visibe that RBI is committed to its inflation target of 4%. The deflationary Trajectory remains the main aim for RBI till Inflation reaches its target.
This is Eight time in a row RBI has kept its key interest rate unchanged. RBI untouched the repo rate since February 2023. Food Inflation still remains greater concern and big hurdle for the descent of overall inflation.
GDP Growth projection of 7.2% seems to be realistic with the prevailing economic and global situations.
It is to be mentioned that the quarterly GDP growth and Annual GDP projections are revised from April, 2024 MPC statements. However, the inflation remains the same.
RBI stance from withdrawal to neutral was expected from many economists/experts. However, the RBI stance shows that there is still some concern around the economy, like worrying food inflation, surging services inflation globally and geopolitical tensions.
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