RBI Monetary Policy: MPC Keeps Repo Rate Unchanged; Inflation To Ease But Headwinds Remain, Says Das

India's Monetary Policy Committee kept the benchmark repo rate unchanged for the seventh straight meet.

Following the review, the MPC decided:

• To keep the repo rate unchanged at 6.5% with a 5:1 majority.

• The standing deposit facility rate, pegged 25 basis points below the repo rate, is at 6.25%.

• The marginal standing facility rate, which is 25 basis points above the repo rate, is at 6.75%.

The committee had raised the benchmark repo rate by 250 basis points in the last cycle before opting for a pause in April last year.

Professor Jayanth R Varma voted to reduce the policy repo rate by 25 basis points. He also voted for a change in stance to neutral.

Growth and inflation projections for FY25 were retained. Headline inflation has eased but remains above the target, driven by food price pressures, though easing core inflation remains a silver lining.

• Food price uncertainties would continue to weigh on the inflation outlook. An expected, record rabi wheat production in 2023-24, however, will help contain cereal prices. Early indications of a normal monsoon also augur well for the kharif season.

• Increasing incidence of climate shocks remains a key upside risk to food prices. Low reservoir levels, especially in the southern states and outlook of above normal temperatures during April-June, also pose concern. Tight demand supply conditions in certain pulses and the prices of key vegetables need close monitoring.

• Fuel price deflation is likely to deepen in the near term following the recent cut in LPG prices. After witnessing sustained moderation, cost push pressures faced by firms are showing upward bias. The recent firming up of international crude oil prices warrants close monitoring. Geopolitical tensions and volatility in financial markets also pose risks to the inflation outlook. 

Economic activity remains resilient with a positive momentum so far and growth continues to surpass estimates. Official estimates peg GDP growth at 7.6% for FY24.

• An expected, normal southwest monsoon should support agricultural activity. Manufacturing is expected to maintain its momentum on the back of sustained profitability. Services activity is likely to grow above the pre-pandemic trend.

• Private consumption should gain steam with further pickup in rural activity and steady urban demand. A rise in discretionary spending expected by urban households, as per the RBI's consumer survey, and improving income levels augur well for the strengthening of private consumption.

• The prospects of fixed investment remain bright with business optimism, healthy corporate and bank balance sheets, robust government capital expenditure and signs of upturn in the private capex cycle.

• Headwinds from geopolitical tensions, volatility in international financial markets, geo-economic fragmentation, rising Red Sea disruptions and extreme weather events, however, pose risks to the outlook.

Looking ahead, the RBI will remain nimble and flexible in its liquidity management through main and fine-tuning operations in both repo and reverse repo, Governor Shaktikanta Das said. "We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity, so as to ensure that money market interest rates evolve in an orderly manner that preserves financial stability."

The decision to pause along with no change in stance was in line with expectations, according to Suvodeep Rakshit, senior economist at Kotak Institutional Equities. Expectedly, the focus of the MPC remained on ensuring disinflation on a sustained basis in order to achieve their medium-term inflation target of 4%, he said.

The RBI is expected to continue to focus on fine-tuning of liquidity conditions through VRR/VRRR auctions in order to align the overnight rates with the repo rate, Rakshit said. "We continue to expect a shallow rate cut cycle from Q3 FY25 onwards with the stance changing to neutral in end-Q2FY25 or along with the rate action."