RBI keeps repo rate unchanged, growth forecast revised to 7%

The Reserve Bank of India has kept the policy repo rate unchanged at 6.50% for the fifth consecutive time against the backdrop of the looming risks to food inflation, which might lead to an uptick in November and possibly in December.

The six-member monetary policy committee voted to keep the lending rate unchanged, and the rate-setting panel also left the policy stance intact, focusing on the withdrawal of accommodation.

“After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the monetary policy committee decided unanimously to keep the policy repo rate unchanged at 6.5%. Consequently, the standing deposit facility rate remains at 6.25% and the marginal standing facility (MSF) rate and the bank rate at 6.75%,” RBI Governor Shaktikanta Das said.

Achala Jethmalani, Economist at RBL Bank, appreciated the policy favoring business continuity. She said, “We see the Repo rate at 6.50% with nimble approach on liquidity management continuing till March 2024.”

The MPC also decided by a majority of five out of six members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth, Das added. 

The RBI also revised its fiscal year 2024 growth forecast to 7% from 6.5%. The central bank has retained the headline inflation forecast at 5.4% for the current fiscal.

Samantak Das, Chief Economist and Head of Research and REIS, India, JLL, said, “In a year marked by global economic uncertainties, India’s economy is surging ahead at faster-than-expected rates, recording a growth of 7.6% during the July-September quarter of FY 2023-24.”

“As growth continues to show strength with the RBI revising its GDP forecast for FY 2023-24 upwards to 7.0% while the inflation threat lingers on, the RBI maintained a ‘withdrawal of accommodation’ stance and kept the lending rates unchanged for the fifth consecutive time,” he added. 

Rajani Sinha, Chief Economist at Care Edge, said that RBI’s monetary policy statement has a less hawkish undertone compared to the preceding October statement. She added, “The upward revision of the GDP growth forecast for FY24 to 7%, coupled with the absence of any reference to future OMO sales, represents a favorable development for both the economy and the markets.” 

Sinha said, “A string of favorable developments has positively influenced the broader economic landscape like the upward surprise in growth, benign core inflation, softening of UST yields, and cooling Brent crude prices.”Sounding caution, Sinha added that it is crucial to remain attentive to certain underlying factors that can increase economic headwinds. Following the projected contraction in Kharif production, close monitoring of the progress in rabi sowing is imperative, particularly in light of lower reservoir levels in certain regions. 

‘Normality still eludes global economy’

Governor Das said the long-awaited normality still eludes the global economy at the end of 2023. He cautioned that the global economy shows signs of a slowdown across geographies and sectors.

“The years 2020 to 2023 will perhaps go down in history as the period of great volatility comprising a host of Black Swan events in quick succession,” he said.

Due to the prevailing uncertainties, Das added that impeding the last mile of disinflation, major central banks have kept rates on hold while refraining from forward guidance. Financial markets remain volatile.

Anuj Puri, chairman of ANAROCK Group, said that the RBI once again decided to keep the repo rates unchanged as the fundamentals of the Indian economy remaining strong with the recently announced GDP rates indicate a positive outlook. 

“This is an extension of the festive bonanza RBI gave the homebuyers in its last policy announcement. It gives homebuyers yet another opportunity to make cost-optimized home purchases,” Puri said.

RBI’s liquidity management

The Reserve Bank of India (RBI) has decided to allow the reversal of liquidity facilities under the Standard Deposit Facility (SDF) and Marginal Standing Facility (MSF) even during weekends and holidays starting from 30 December. The SDF and MSF rates have been adjusted to 3.75% and 4.15%, respectively. Karthik Srinivasan, Senior Vice President, Group Head – Financial Sector Ratings, ICRA, said that given the 24X7 fund transfer facility, the banks face challenges in liquidity management over the weekend when inter-bank markets are closed. He said, “Banks with surplus liquidity end up locking the funds for three days under SDF over the weekend. With the proposal to reverse these three days of MSF and SDF facilities, we expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to moderate. However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially. This will also lead to marginal savings in interest costs for banks who borrow and deposit in MSF and SDF over the weekend.”

The Reserve Bank of India (RBI) has two liquidity management instruments: the Marginal Standing Facility (MSF) and the Standing Deposit Facility (SDF). The MSF is an overnight liquidity support scheme that provides funds to commercial banks with a higher interest rate than the repo rate. It is an emergency liquidity facility available on all working days and most holidays. On the other hand, the SDF is a collateral-free liquidity absorption mechanism that absorbs excess liquidity from the banks by providing an interest payment.