RBI Monetary Policy: Central Bank Keeps Repo Rate Unchanged At 6.5%, GDP Growth Projected At 6.5% For FY24

In a bid to contain inflation the RBI has already increased the repo rate by a total of 250 basis points since May 2022

Having remained below 6 per cent in November and December 2022, the retail inflation breached the RBI's comfort zone in January.

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In a surprise move, the Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC), headed by Governor Shaktikanta Das, on Thursday announced to keep policy rate unchanged at 6.5 per cent.

MPC uninanimously decided to keep policy repo rate unchanged at 6.5 per cent. The decision to pause is for this meet only. "Monetary Policy Committee will not hesitate to take any action in future, says RBI Governor after hitting pause button on rate hike," Das said.

In his speech, the governor said that the central bank to remain focused on withdrawal of monetary policy accommodation. Raising interest rates is a monetary policy instrument that helps to supress the demand in the economy and thus helps in reducing inflation.

The real GDP growth projected at 6.5 per cent for FY24 from its earlier estimate of 6.4 per cent, keeping the global geopolitical and financial uncertainity in mind the governor said.

The governor said the economic activity remains resilient, economy expected to grow 7 per cent in FY23, he mentioned.

The current policy rate is accomodative keeping in mind the current level of inflation.

Core inflation — which excluded volatile food and fuel inflation and a key concern for the RBI — has remained sticky above 6 per cent in recent months.

The Indian rupee moved in orderly manner in FY23, RBI to remain watchful, the governor said, while adding that the bank will maintain agile approach for liquidity management and to manage government borrowing programme in non-disruptive manner. 

The RBI is also keeping a close watch on turmoil in banking sector in developed countries as the global economy facing financial challenges in wake of recent bank failures.

According to his speech, the MPC lowered forecast of CPI inflation to 5.2 per cent from 5.3 per cent previously.

Inward remittances by NRIs hit a record high of $107 billion in 2022, he said as GCC countries to remain main source of remittances. 

During announcement, Das said the RBI permits operation of pre-sanctioned credit lines at banks to widen and expand footprint of UPI and the bank will set up centralised portal to search across multiple banks for unclaimed deposits.

Economists and analysts widely expected the RBI to hike the interest rate by another 25 basis points and take the repo rate to 6.75 per cent. However, they also caution that policy tone needs to be balanced and in line with the current global headwind. A large majority of economists, 49 of 62, opined the RBI would raise its repo rate by 25 basis points to a seven-year high.

Achala Jethmalani, economist, RBL Bank, said, "The policy appears to be a hawkish pause as the MPC turns data dependent whilst it awaits the monetary efficacy from prior rate hikes to play out into the deposit and lending rates. With the governor stating that today’s pause on policy rates is for this policy only, it has the elbow room to act on rates if inflation readings surprise on the upside. Basis the current growth-inflation dynamics and the global backdrop, the Repo Rate is likely to peak out at 6.50-6.75 per cent with a possibility of a final 25bps to be delivered in 1HFY24."

Siddhartha Sanyal, chief economist and head of research, Bandhan Bank, said, "The RBI’s ‘surprise’ pause on the repo rate in April is completely in line with our expectation. In fact, the 6-0 voting in favour of a pause is stronger than our expectation. With the likely softening of CPI to low- to mid-5 per cent levels in the coming month, the current repo rate of 6.5 per cent implies that India’s real policy rate will hover around 1 per cent during 2023-24, while maintaining a policy rate differential of about 1.5 per cent with the US. This clearly helped the decision of a pause on the repo rate."

In a bid to contain inflation the RBI has already increased the repo rate by a total of 250 basis points since May 2022. However, inflation has continued to remain above the RBI's comfort zone of 6 per cent most of the time. 

Last month, the US Federal Reserve announced another 25 basis points interest rate hike to tame inflation. With the hike, the Fed has increased the federal funds rate from nearly zero in March 2022 to a range of 4.75-5 per cent. The European Central Bank and Bank of England have also hiked their benchmark rates.

Having remained below 6 per cent in November and December 2022, the retail inflation breached the RBI's comfort zone in January. Headline retail inflation rate was down to 6.44 per cent in February from a three-month high of 6.52 per cent hit in January, according to data released by the Ministry of Statistics and Programme Implementation.