RBI holds repo rate steady amid uncertain monsoon, inflation woes

The Reserve Bank of India (RBI) has left its key interest rate unchanged for the second consecutive time, while retaining its tightening stance, as the late onset of the monsoon raised concerns.

The monetary policy committee (MPC), the Reserve Bank’s six-member rate-setting panel, unanimously decided to keep the repo rate at 6.5%, all eyes fixed on inflation.

The panel also voted 5 to 1 on the move to retain the policy stance focused on “withdrawal of accommodation,” which was introduced April last year. 

The policy stance reflects RBI’s guarded approach towards inflation, reiterating that persistent price rise remains a key concern.

“A close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain,” RBI governor Shaktikanta Das said on Thursday. 

Rajani Sinha, chief economist at CareEdge Group, said: “RBI has continued to emphasize on bringing the retail inflation closer to its target. Amid a volatile global economic scenario and lingering risks to domestic inflation, it is prudent that RBI has followed a wait-and-watch strategy. While RBI has marginally lowered the CPI inflation projection for FY24 to 5.1%, it has emphasized the inflationary risks.”

“With domestic growth holding up well, we have raised our GDP growth projection to 6.5% for FY24 (from the previous projection of 6.1%). With concerns on the growth front abating and CPI (Consumer Price Index) inflation likely to remain above the 4% target, we expect a status quo on the policy rates in 2023,” she added.

To help ease lenders’ liquidity worries, Das said scheduled commercial banks can now set their limits for borrowing in call and notice money markets. 

Karthik Srinivasan, senior vice-president, group head-financial sector ratings, ICRA, said, “This will allow more flexibility to banks. With the current volatility in liquidity conditions, banks can better plan liquidity management, and the LCR (liquidity coverage ratio) requirements will ensure that dependence on call borrowing is under check.” 

Meanwhile, the real estate sector sees RBI’s decision to keep the repo rate unchanged as aiding sales.

“The unchanged repo rate can help us maintain the momentum in housing sales, which has been firing on all cylinders in 2023. As per Anarock Research, housing sales in the first quarter of 2023 scaled new heights, breaching the 100,000 mark across the top 7 cities,” Anuj Puri, chairman of Anarock Group, a real estate services firm, said.

In recent weeks, the monetary policy committee has ramped up efforts to drain liquidity from the banking system, eliminating about ₹1.5 trillion (about $18.2 billion) this month alone, Das said, adding that about half of the ₹2,000 currency notes in circulation have been returned as on 31 March.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said, “The current pause still signals a tightening stance as projected inflation continues to be above the tolerance band of RBI. From this perspective, current policy remains a non-event, largely on expected lines.”

Ghosh said, “The outlook on the global economy is clouded by sideways movements in most of the indicators even when moderating inflation, tighter financial conditions, banking sector stress, and lingering geopolitical conflicts persist. Weak external demand owing to a slowdown in advanced economies, elevated debt levels and geo-economics disintegration amidst tighter external financial conditions pose risks to growth prospects.

“Meanwhile, liquidity surplus in the system has again increased…and the government surplus cash balances have started declining from the 3rd week of May. Even the deposit of ₹2,000 notes in banks has added to the liquidity. As we have earlier highlighted, around 85% of the ₹2,000 notes are deposited in bank accounts and not exchanged for smaller denominations. Thus, bank deposits are likely to increase by at least ₹2 trillion, assuming some of the notes would already be with banks in currency chests. Overall deposit growth in FY24 should grow over 11% year-on-year. This will effectively imply that the spate of deposit rate hikes could be a thing of the past,” he added.

With GDP growth in FY24 set to decline from 8% in Q1 to 5.7% in Q4, “we pencil in the first rate cut by RBI in Q4 FY24. The magnitude could be larger than 25 bps”, Ghosh added.