RBI keeps repo rate unchanged for the fourth time

The monetary policy committee of the Reserve Bank of India on Friday voted to keep the policy repo rate unchanged at 6.50 % for the fourth consecutive time following a detailed assessment of the evolving macroeconomic and financial developments and the outlook. 

The standing deposit facility (SDF) rate will remain at 6.25%, and the marginal standing facility (MSF) rate and the Bank rate at 6.75%, announced RBI governor Shaktikanta Das. He said that RBI has identified high inflation as a significant risk to macroeconomic stability and sustainable growth and added that monetary policy remains resolutely focused on aligning inflation to the 4% on a durable basis.

“The Monetary Policy Committee (MPC) also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” he said. 

Das added that Headline inflation had surged in July, driven by tomato and other vegetable prices. He said that it corrected partly and is expected to see further easing in September on the back of the moderation in these prices. Das said, “A silver lining amidst all this is declining core inflation (i.e., Consumer pricing index excluding food and fuel).” 

However, Das cautioned that the overall inflation outlook is clouded by uncertainties from the fall in Kharif sowing for critical crops like pulses and oilseeds, low reservoir levels, and global food and energy prices. 

Supporting the MPC’s decision to keep the policy repo rate unchanged at 6.50%, Das said, “Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points, which is still working through the economy, the MPC decided to keep the policy repo rate unchanged.”

Das added that MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, to align inflation with the target and anchor inflation expectations. “CPI inflation is projected at 5.4% for 2023-24, with Q2 at 6.4%, Q3 at 5.6% and Q4 at 5.2%. The risks are evenly balanced. CPI inflation for Q1:2024-25 is projected at 5.2%,” Das added in a press conference following a day MPC meeting.  

Demand Revival 

On the demand front, steady expansion is seen in urban consumption, while rural demand shows signs of revival. Das expressed optimism that future domestic demand conditions will likely benefit from sustained buoyancy in services, consumer and business optimism, the government’s continued thrust on capex, healthy balance sheets of banks and corporates, and supply chain normalization. Adding that headwinds from geopolitical tensions and geo-economics fragmentation, volatility in global financial markets, global economic slowdown, and uneven monsoon pose risks to the outlook. He said, “Considering all these factors, real GDP growth for 2023-24 is projected at 6.5 % with Q2 at 6.5%; Q3 at 6.0%; and Q4 at 5.7%. The risks are evenly balanced. Real GDP growth for Q1:2024-25 is projected at 6.6%.”

The benchmark Sensex and Nifty vaulted by 257 points and 78 points, respectively, to 65,888 and 19,624 as RBI’s rate-deciding panel decided to continue the repo rate at the existing level.

ICRR withdrawal 

Ahead of the festive season, RBI is discontinuing its imposition of I-CRR of 10% in a phased manner on 7 October. Das, however, maintained, “Excessive liquidity can pose risks to both price and financial stability. Das added that the Reserve Bank’s imposition on incremental cash reserve ratio (I-CRR) of 10%, which impounded Rs1.1 lakh crore from the banking system, is being discontinued in a phased manner on 7 October, i.e. tomorrow.” 

He added, “The release of the remaining impounded I-CRR funds tomorrow and pick up in government spending is expected to ease liquidity conditions. Festival time increases in currency demand may act as a counterbalancing factor. 

“It is a turning pitch and we will play our shots carefully. Going forward, while remaining nimble, we may have to consider OMO sales (Open Market Operation sales) to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,” he further said. 

RBI is watchful of liquidity conditions

“The Monetary Policy Committee’s decision to maintain the current policy rate and stance was on the expected lines. Overall, the policy had a hawkish undertone to it. The governor sounded cautious about inflation even though the full-year inflation projection was unchanged. It is to be noted that the governor reiterated the RBI’s commitment to bring CPI inflation down to the 4% target. The RBI kept the GDP growth projection for FY24 untouched as they await additional data points to assess the evolving dynamics comprehensively.” said Rajani Sinha, Chief Economist CareEdge ratings.  “Furthermore, the RBI remains watchful of the liquidity conditions and wants to ensure no build-up of surplus liquidity. Hence, the governor announced that RBI would consider open market operation (OMO) sale of government securities to mop up excess liquidity as required. We expect the RBI to start its rate-cutting journey from the second quarter of the next fiscal year as inflation edges closer to the 4% target,” Sinha further added.

Status Quo was expected

“The status quo on the policy rate was on expected lines as the focus of the MPC has been on prioritizing growth and giving demand stimulus during the ongoing festive season. Though inflation has been softening over the long term, it remains above the upper tolerance limit of the Central Bank, and the impact of monsoons is yet to be factored in. Headline inflation fell to 6.8% in August from 7.4 % in July with the cooling of vegetable prices.” said Dr. Samantak Das, Chief Economist and Head- Research & REIS, JLL India.

 Home purchases to boost up

Anuj Puri, Chairman – ANAROCK Group, said, “The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimized home purchases.” Puri added, “We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market.” 

As per ANAROCK Research, housing sales across the top 7 cities created a new peak in Q3 2023 (despite the usually slow monsoon quarter) and stood at 1,20,280 units as against over 88,230 units sold in Q3 2022, thus recording 36% yearly growth. We can expect the momentum to continue thanks to the stable repo rate and the resultantly stable home loan interest rates.