RBI Monetary Policy: Repo Rate, Stance Unchanged; Das Says 'Job Is Not Finished Yet'

India's Monetary Policy Committee has decided to keep the benchmark repo rate unchanged for the sixth straight meet, as food inflation concerns persist while economic activity stays resilient.

Following the review, RBI Governor Shaktikanta Das said that the MPC decided:

• To keep the repo rate unchanged at 6.5% by 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 starting April last year.

Adjusting for government cash balance, potential liquidity is still in surplus, said Das. The stance of withdrawal of accommodation should be seen in the light of incomplete transmission and inflation remaining outside of the target, and the efforts to bring it back to the target on a durable basis, he said.

The Reserve Bank, he said, remains nimble and flexible in liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo. "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 and financial stability is maintained."

"From a liquidity management perspective, we expect the weighted average call rate to be between MSF and repo rate," said Gaura Sen Gupta, India economist at IDFC First Bank Ltd. The move towards repo rate is expected by March-end-April 2024, as government expenditure picks up, according to Sen Gupta.

The next steps would be reduction in policy rates, which is expected to start from June/August onwards, she said.

The MPC will carefully monitor any signs of generalisation of food price pressures to non-food prices which can fritter away the gains in the easing of core inflation, the RBI governor said.

• Going forward, the inflation trajectory would be shaped by the evolving food inflation outlook. Rabi sowing has surpassed last year’s level. The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet, considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events. Effective supply-side responses may keep food price pressures under check.

• The continuing pass-through of monetary policy actions and stance is keeping core inflation muted. Crude oil prices, however, remain volatile. Manufacturing firms covered in the Reserve Bank’s enterprise surveys expect some softening in the growth of input costs and selling prices in Q4 FY24, while services and infrastructure firms expect higher input cost pressures and growth in selling prices. 

The first advance estimates by the National Statistics Office project GDP growth at 7.3%.

• Looking ahead, recovery in rabi sowing, sustained profitability in manufacturing and underlying resilience of services should support economic activity in FY25.

• Among the key drivers on demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates; and government’s continued thrust on capital expenditure.

• Improving outlook for global trade and rising integration in global supply chain will support net external demand. Headwinds from geopolitical tensions, volatility in international financial markets and geo-economic fragmentation, however, pose risks to the outlook