It lowered inflation forecasts for the fiscal year citing adequate supplies and unlikely demand push as tepid global growth buoys expectations of further easing in commodity prices. But geopolitical tensions and the effect El Nino are uncertainties the economy will face. The RBI kept economic growth expectations at 6.5 percent.
The central bank drew comfort from the rising banking liquidity due to withdrawal of the Rs. 2,000 denomination currency notes but promised to act when needed though it remained focussed on withdrawal of monetary accommodation. Repo rate, or the rate at which the central bank lends to banks, remains unchanged at 6.5%.
“With the recent rabi harvest remaining largely immune to the adverse weather events, the near-term inflation outlook looks more favourable than at the time of the April MPC meeting,’’ said Shaktikanta Das, Governor, Reserve Bank of India. “Anchoring of expectations (inflation) is underway and that our monetary policy actions are yielding the desired results. This also provides us the space to keep the policy rate unchanged in this meeting.’’
An ET poll forecast a pause by the Monetary Policy Committee where two external members have been dissenting on tight monetary conditions.
OECD vs EMs
Central banks across the world are torn between preventing economies from tipping into recession and continuing their actions with higher interest rates to cool price pressures that have been running at multi decade highs. While developed world central banks are still in tightening mode as prices in the US and the UK are well above their target, some developing nations are on a wait and watch mode.“A pause will allow for the lagged impact of past hikes to filter through to the real economy, with policymakers keen to keep real rates in positive territory,’’ said Radhika Rao, economist at DBS. “Liquidity swings will be met via need-based money market operations rather than durable tools.’’Investors were cautious after the announcement, with the Sensex rising 0.25 per cent to 63298 points, and the rupee little changed at Rs 82.56 to the US dollar. Yield on the benchmark bond up 2 basis points to 7%.
Like the repo rate, all the other benchmarks, such as the reverse repo rate and the lending rate under the penal Marginal Standing Facility, also remain where they were after the first policy review in FY24.
The central bank, which has raised policy rates by 2.5 percentage points since May last year, believes that India could be an oasis in the world where economic growth is hard to come by. Even China, which propelled global growth for nearly two decades is faltering with exports shrinking and domestic defaults soaring.
“ Indian economy and the financial sector stand out as strong and resilient in a world of unprecedented headwinds and swift cross currents,’’ said Das. “Unlike the previous three tumultuous years, the uncertainty on the horizon appears comparatively less and the path ahead somewhat clearer.’’
Stance dissent
The six-member Monetary Policy Committee voted unanimously to keep the policy rates unchanged. Five voted in favour of keeping the monetary stance focused on withdrawal of accommodation. External member J.R. Varma voted against it.
The current situation is a sharp turnaround from where the RBI was. The central bank had to write to the government on how it intended to bring it down to the targeted 4 per cent after failing to keep it within the target.
The central bank scaled down the inflation forecast for the current fiscal for the second straight time to 5.1 percent from 5.2 per cent. In February it forecast prices to rise 5.3 per cent.
Liquidity which has been volatile would be dealt with appropriately though the flow of Rs. 2,000 notes into the banking system has complicated the management with the central bank conducting repo and reverse repo auctions to manage it.
“The response has been cautious in these auctions,’’ said Das. “Going forward, the Reserve Bank will remain nimble in its liquidity management. The Reserve Bank will also ensure the orderly completion of the government’s market borrowing programme.’’