RBI keeps repo rate at 6.5%, raises GDP growth forecast
Context
The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) unanimously decided on Friday to keep key interest rates unchanged, raise its GDP growth projection for 2023-24 to 7% from 6.5%, and maintain its average inflation forecast at 5.4%, while warning that inflation could spike in November and December.
What is the role of the Monetary Policy Committee?
- The Monetary Policy Committee (MPC) of India is in charge of determining the country’s benchmark interest rate. The MPC was formed on June 27, 2016. It meets at least four times yearly and publishes its conclusions following each one.
- The MPC’s purpose in determining the benchmark policy interest rate (repo rate) is to keep inflation within a specific target range.
What are the key points in the report published by the MPC?
- Unchanged Interest Rates: The RBI’s Monetary Policy Committee (MPC) agreed to maintain key interest rates, including the repo rate, unchanged. The repo rate stayed unchanged at 6.5%.
- GDP Growth Projection Increased: The MPC increased the GDP growth projection for 2023-24 to 7% from 6.5% previously.
- Concerns about Inflation: The MPC maintained its average inflation projection of 5.4%, but warned of probable price rises in November and December. RBI Governor Shaktikanta Das underlined the volatility in headline inflation due to supply shocks.
- Policy Position and Outlook: Five of the six MPC members voted to maintain a policy position centred on “withdrawal of accommodation.” There was no hint, however, of when interest rates may be reduced.
- Food Inflation and Uncertainty: While food inflation has slowed, the RBI Governor has expressed concern about the volatility of food prices. The MPC is wary of allowing food inflation rises to become widespread.
- Maintaining the 4% Inflation objective: Governor Das stressed the necessity of not just meeting but also maintaining the 4% inflation objective on a long-term basis. He did, however, note the challenge of providing “forward guidance” given the current level of uncertainty.
- Inflation Expectations: The Reserve Bank of India forecasts inflation to average 5.6% in the current quarter, implying a possible inflation rate close to 6%, which is the upper tolerance limit. Inflation is anticipated to average 5.2% from January to March 2024.
- Prolonged Monetary Policy Pause: According to certain analysts, such as QuantEco Research, the RBI will keep a protracted pause on the monetary policy rate until August 2024, with a possible pivot after that dependent on the durability of the 4% inflation objective.
Conclusion
In conclusion, the RBI’s monetary policy decision indicates a cautious strategy that takes into account both economic growth and inflation concerns, with an emphasis on achieving and maintaining the 4% inflation objective.
