The Reserve Bank of India (RBI) kept the benchmark repo rate unchanged at 6.5% after a two-day monetary policy meeting on Thursday as widely anticipated, the second consecutive time it held rates steady, signalling cooling inflation and better growth in Asia’s third-largest economy.
The RBI forecast a 6.5% GDP expansion in 2023-24, lower than a GDP growth of 7.2% for 2022-23. The bank sees inflation at 5.1% in the current fiscal.
Governor Shaktikanta Das on Wednesday said inflation still remained a threat but was trending down, paving the way for a pause in rate hikes for the second time. The decision to hit the pause button was taken unanimously by the six-member monetary policy committee of the RBI.
“We have made good progress in containing inflation, supporting growth, and maintaining financial sector stability,” Das said. “We need to ensure that long-term inflation remains firmly anchored. RBI is watchful, proactive in dealing with emerging risks to price and financial stability.”
Das said India’s current account deficit – a key macro-economic parameter — “should be eminently manageable” in FY24. The fiscal deficit is the difference between what the government earns and spends.
Helped by buoyant tax receipts, the country’s fiscal deficit for the last financial year narrowed to 6.4% from a year earlier, thus meeting the government’s budget gap target, according to the latest official data.
Presenting the Union budget for the current financial year, finance minister Nirmala Sitharaman on February 1 retained India’s aim to narrow the fiscal gap to 6.4% of GDP from 6.7% in the last financial year. The deficit target for 2023-24 has been pegged at 5.9% of the GDP.
Central banks typically raise or decrease key lending rates largely based on how it thinks inflation will pan out in the future and not on price levels witnessed in the past.
The RBI raised India’s key lending rate by 250 basis points between May 2022 and February 2022. It decided to keep rates unchanged in its last review on April 2023. One basis point is one-hundredth of a percentage point.
The majority of bets among polled economists ahead of the central bank’s second bi-monthly monetary policy decision of FY24 were on a pause in repo rate.
The key reason behind the six-member monetary policy committee of the RBI going steady on rates is that consumer inflation has stayed comfortably below the RBI’s upper tolerance limit of 6%.
“However, monetary policy focus remains on aligning inflation with the 4% target, with inflation expected to average at 5.1% in FY24. However, risks remain from monsoon outlook, given high chances of El Nino conditions developing,” said Gaura Sengupta, India economist, IDFC First Bank.
In April 2023, the Consumer Price Index-based inflation eased to 4.7%, the second consecutive month when retail price growth came within the RBI’s upper tolerance limit of 6%. Inflation had been above the RBI’s limit from January 2022 until March 2023, when the pace of retail price growth slowed to its lowest level in the past 15 months.
However, future hikes can’t be ruled out, analysts said, and much will depend on how prices pan out this summer amid a widely predicted El Nino weather pattern, which can impede the June-September monsoon, the life-blood of Asia’s third-largest economy.
Ahead of the Wednesday policy review, Das said the previous policy decision – of not increasing rates further – was a pause not a pivot, hinting at the possibility of future tightening.
The repo rate refers to the rate at which commercial banks borrow money by selling their securities to RBI, while the reverse repo rate is the rate at which the central bank borrows money.
These rates are key to boosting credit and investments by businesses to boost economic growth. A hike makes borrowing expensive for businesses, limiting money supply and cooling inflation – the key objective of why banks hike benchmark rates.
However, successive rate hikes – as done by the US Fed – can also shave off growth and erode the value of investment. In extreme cases, it can also stoke a slowdown.
Under Indian laws, if inflation hovers above 6% for three straight quarters, the RBI must explain to the government the reasons for failing to meet its inflation target and recommend remedial actions.
