RBI Googly: No change in repo rate; FY24 GDP projected at 6.5%

CHENNAI: The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Thursday unanimously decided not to revise the repo rate, the central bank's Governor Shaktikanta Das announced.

The MPC decided to keep the repo rate -- the rate at which RBI lends to the banks -- at 6.5 per cent taking into account the macroeconomic conditions.

In the same vein, the RBI Governor added the war against inflation to continue till the decline in inflation rate is closer to the target -- 4 per cent.

"We are on the right track to bring down the inflation rate," Das said, adding that the MPC will not hesitate to take further action to fight inflation.

According to him, the decision to hold on the repo rate is only a 'pause' and not a 'pivot'.

The Indian inflation rate is 6.4 per cent as per February 2023 data and in FY24 it is expected to moderate, he said.

The monetary policy actions taken since May 2022 are still working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far, while closely monitoring the evolving inflation outlook," he said.

Recalling the rate hikes, Das said since May 2022, the repo rate has been hiked by 250 bps and it was preceded by the introduction of the Standing Deposit Facility (SDF) at a rate 40 bps higher than the fixed rate reverse repo.

"Thus, the effective rate hike since April last year has been 290 bps. These increases have been fully transmitted to the overnight weighted average call money rate (WACR), the operating target of monetary policy, which has gone up from daily average of 3.32 per cent in March 2022 to 6.52 per cent in March 2023.

"It is now necessary to evaluate the cumulative impact of these rate hikes," Das explained.

The MPC decided to remain focused on withdrawal of accommodation as the inflation is higher than the four per cent target.

Stressing the point, a senior RBI official said this pause decision is valid till the next MPC meeting.

According to Das, for FY24 the inflation rate is predicted at 5.2 per cent with Q1 5.1 per cent, Q2 5.4 per cent, Q3 5.4 per cent and Q4 5.2 per cent.

Das said the expectation of a record rabi harvest bodes well for easing of food price pressures. There is already evidence of a correction in wheat prices in March on supply side interventions by the government. The impact of the recent unseasonal rains in some parts of the country, however, needs watching.

The RBI arrived at the FY24 inflation figure taking into account factors like the rising uncertainty in international financial markets, imported inflation, assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon.

On economic growth, Das said the gross domestic product (GDP) for FY23 was 7 per cent.

For FY24, the GDP growth is expected at 6.5 per cent with Q1 7.8 per cent, Q2 6.2 per cent, Q3 6.1 per cent, Q4 5.9 per cent.

Das said the risks are evenly balanced for both inflation and GDP growth projections.

Meanwhile, the decision to keep the repo rate unchanged has taken the market by surprise as the majority predicted a hike of 25 bps.

"It is interesting that while RBI has paused on the policy rate front, it has also strongly reiterated its commitment to bringing down inflation," Rajani Sinha, Chief Economist, CARE Ratings said.

"We expect a status quo in policy rate in 2023. Even while emphasising the risks posed by the global uncertain economic environment, the RBI remains quite optimistic on growth, raising the GDP growth projection for FY24 to 6.5%. This is higher than our GDP growth projection of 6.1% for FY24," she added.

Interestingly, it was only the State Bank of India economists who had predicted that the RBI may not hike the repo rate.