The Reserve Bank of India extended a pause on hiking interest rates any further with the repo rate at 6.50%, a move widely anticipated by market participants as India inflation continued to follow a downward trajectory.
The RBI said it would remain focused on withdrawal of accommodation to ensure inflation progressively aligns with the target, while supporting growth. RBI’s medium-term target for consumer price index (CPI) inflation is 4% within a band of +/- 2%.
The CPI, which is closely mapped by the RBI as the core metric for inflation, fell sharply to 4.7% in April 2023 from 6.4% in February helped by easing in food group inflation in items such as cereals, eggs, milk, fruits, meat and fish, spices, among others as well as moderation in fuel group inflation of liquified petroleum gas, firewood and chips prices, and kerosene prices that slipped into deflation. CPI inflation excluding food and fuel dipped as well.
The liquidity adjustment facility (LAF) was left unchanged at 6.50 per cent and the standing deposit facility (SDF) rate remained unchanged at 6.25% while the marginal standing facility (MSF) rate and the bank rate continued to stand at 6.75%.
RBI’s Growth Outlook
The India Meteorological Department (IMD) has forecast the south-west monsoon to be normal; this is great news for kharif crops production. Sustained buoyancy in services is also expected to support private consumption and overall economic activity in the current year, the RBI said.
With geopolitical conflict continuing and policy normalization globally far from complete, external risks including demand, geoeconomic fragmentation, and protracted geopolitical tensions remain. On the domestic front, the RBI sees the headline inflation trajectory to be shaped by the evolving food price dynamics, mainly wheat and milk prices that are likely to witness some pressure and crude oil prices. Another area of concern in curbing inflation would remain the even distribution of monsoon that would be monitored closely to evaluate agricultural production.
Keeping all these factors in mind, the RBI expects CPI inflation at 5.1% for 2023-24, with Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2% with balanced risks. The real gross domestic product (GDP) growth for 2023-24 is projected at 6.5% with Q1 at 8.0%, Q2 at 6.5%, Q3 at 6.0%, and Q4 at 5.7%.
The RBI said the cumulative rate hike of 250 basis points undertaken by the MPC is transmitting through the economy and its fuller impact should keep inflationary pressures contained in the coming months.
The MPC resolved to continue keeping a close vigil on the evolving inflation and growth outlook and said, “it will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target.”
The policy repo rate has been increased by 250 basis points since May 2022 and is still working its way through the system with its fuller effects still to be completely seen in the remainder of the year.
Market Reaction
Majority of the market participants expected the RBI to continue with its hawkish stance on further rate hikes. Whispers of RBI beginning to bring down rates to cool off the overall liquidity pressure were put to rest as the RBI clarified it needed to maintain strict vigil to curb inflation from rising.
Murali Ramakrishnan, the managing director of South Indian Bank, in a press note said “The RBI deserves praise for its efforts in controlling inflation by prudently calibrating the policy repo rate through successive quarters. MPC’s well-timed rate hikes earlier have allowed it the leeway to keep the repo rate unchanged at 6.5% for the current cycle.”
Rajani Sinha, the chief economist at CareEdge Ratings, expects a status quo on the policy rates in 2023 with concerns on growth front abating and CPI inflation likely to remain above the 4% target.
Real estate players such as Piyush Bothra, co-founder of Square Yards, said the RBI’s decision to maintain status quo for the second time affirms the view that interest rates will only have one direction, which is downwards. This is a big positive for the home buyer as they know that their EMIs down the line will only decrease further.
Both the BSE Sensex and NIFTY 50 fell about half a percent in day’s trade on June 8.
