The Reserve Bank-led Monetary Policy Committee Friday left the policy rate or the repo rate unchanged at 6.5 percent for the seventh consecutive time, citing rising inflationary pressure in the economy led by spiralling food prices.
The repo rate is the rate below which banks cannot led and most banks today lend at a pre-disclosed margin of 2-3 percent above this rate, called external benchmark linked lending rate.
The central bank has also maintained its “withdrawal of accommodation” stance, something the market wasn’t expecting, saying the growth numbers have been surprising on the upside and therefore the priority has to be anchoring of inflation to the target of 4 percent.
The decision to hold the repo rate at 6.5 percent was near unanimous with five of the six members voting for the status quo. Accordingly, the marginal standing facility at 6.75 percent and the standing deposit facility rate remain unchanged at 6.25 percent, governor Shaktikanta Das said announcing the first MPC review in the current fiscal.
Das further said that the MPC, with a similar number of votes, chose to maintain the objective of taming prices again as food prices are on the boil already.
Although the RBI has also forecast the robust growth momentum to continue in FY25, it has retained the last year's real GDP forecast of 7 percent for this fiscal as well, with risks evenly placed.
On the sticky issue of prices, Das said given the expectations of normal monsoons, the MPC has forecast the retail price inflation as measured in CPI at 4.5 percent for the full year with Q1 printing in at 4.9 percent, Q2 at 3.8 percent, Q3 at 4.6 percent and final quarter printing in at 4.4 percent with risks evenly factored in.
The continued focus on inflation management since May 2022 has helped the central bank reach almost its yearly forecast of 5.4 percent for FY24.
While status quo on the policy rate was on expected lines given that other central banks are holding tight on this front, many Mint Road watchers were expecting a change in the policy stance.
It can be noted that the Q3 GDP surprised on the upside printing in at 8.4 percent leading to both RBI and the government revising their growth forecast for FY24 at over 8 percent. On the other hand inflation has been sticky though declined to 5.1 percent in both February and March from 5.7 percent in the previous two months and since then there has been concerns about a heatwave sweeping the country in April and May which will upset food supplies. Also crude oil has been on the boil since last and has crossed the $90 a barrel already.