The rate-setting panel of the Reserve Bank of India(RBI) on Thursday unanimously decided to keep the repo rate unchanged at 6.5 per cent for the third time in a row, said RBI governor Shaktikanta Das while announcing the decisions of the three-day Monetary Policy Committee (MPC) meeting.
"The MPC decided to remain watchful and evaluate the situation," said Das.
The RBI also retained its withdrawal of accommodation stance by five-to-one vote to ensure the headline inflation remains within the target of 4 per cent. The governor said, "With monetary transmission still underway and headline inflation remaining higher than the 4 per cent target, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth."
While explaining rationale behind keeping the key policy rate unchanged, Das stated that the cumulative rate hike of 250 basis points undertaken by the MPC is working its way into the economy. He said the domestic economic activity is holding up well and is likely to retain its momentum, despite weak external demand.
"The MPC remains resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations," he added.
Meanwhile, the inflation forecast was revised upwards to 5.4 per cent from 5.1 per cent earlier on the back of rising vegetable, cereal and pulse prices.
The GDP forecast for FY24 was retained at 6.5 per cent by MPC as announced in June. At its previous meeting, the MPC had projected real GDP growth for the entire fiscal at 6.5 per cent with Q1 at 8.0 per cent, Q2 at 6.5 per cent, Q3 at 6.0 per cent, and Q4 at 5.7 per cent.
While announcing the key decisions, the governor also stated that the RBI remains steadfast in its commitment to safeguard financial system from emerging and potential challenges.
"As widely anticipated, the RBI has decided to keep the repo rates unchanged at 6.5 per cent. India continues to outperform other countries in terms of consumption and with the festive season coming up, the RBI will not risk denting it. This is nothing but good news for aspiring homebuyers on the market for a purchase in the near future. The unchanged repo rate will help maintain the momentum in housing sales - particularly in the mid and luxury segments, which did significantly well in H1 2023, ..
Kotak Mahindra Bank's chief economist Upasna Bhardwaj said, "The MPC preferred to remain on a wait and watch mode along expected lines. We believe that the seasonal uptick along with erratic weather conditions to continue to keep the hawkish bias of the MPC intact in the upcoming meetings as well. However, we expect the rates to remain unchanged through the rest of the year as they evaluate the impact of earlier monetary tightening in growth and inflation.”
The repo rate, the key policy rate at which the RBI lends to the banks, was last increased in February 2023 by 25 basis points (bps). The RBI had kept the rate unchanged in April and June meetings.
An ET Poll of 15 respondents had predicted that the repo rate will be kept unchanged at 6.50 per cent with retention of withdrawal of accommodation stance.
Similarly, a July 13-31 Reuters poll of 75 economists had shown the central bank was expected to keep its repo rate unchanged at 6.50 per cent at its Aug 10 policy meeting.
"Inflation is expected to head towards the 6 per cent mark because of vegetables and pulses prices going up. We expect this to be temporary in nature and therefore there is no case of increasing rates. The fact that other central banks have been increasing rates may not be a primary factor but could be another justification for not changing the repo rate," Madan Sabnavis, chief economist, Bank of Baroda, had said.
The experts had suggested the continuation of the no-hike trend, with several economists predicting CPI inflation at 6-6.5 per cent as against 4.81 per cent in June.
The inflation print for June surged to 4.81 per cent, after falling to a 25-month low of 4.25 per cent in May.
With the rising prices of fruits and vegetables, the number is expected to accelerate. The RBI has been on a rate-hike spree to keep the inflation within its tolerance band of 2-6 per cent.
Source Name : Economic Times