RBI Maintains Status Quo; Repo Rate Unchanged At 6.50%

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Published: Aug 10, 2023, 5:50pm

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The Reserve Bank of India (RBI) announced a pause on any revision to the repo rate, which will continue to stand at 6.50% for the third consecutive time amid a slowing global economy and spiking inflation on the home turf. 

RBI Governor, Shaktikanta Das, in a statement on August 10, 2023, said the monetary policy committee will remain focused on withdrawal of accommodation as merited to ensure inflation does not obstruct growth prospects and aligns with the target of medium-term consumer price index (CPI) of 4% within a band of +/- 2% while supporting growth.

The standing deposit facility (SDF) rate was left unchanged at 6.25% and the marginal standing facility (MSF) rate and the bank rate stood at 6.75%.

What the RBI Has Said On Repo Rates

The RBI said the decision to unanimously keep the policy repo rate unchanged was taken in light of the robust momentum in the domestic economic activity despite weak external demand. 

In the context of the headline inflation rising in June and expected to further rise in July-August led by vegetable prices, possible El Niño weather conditions and global food prices against the backdrop of a skewed south-west monsoon till now, the RBI is ready for further action reign in inflation to meet its 4% target.

Das outlined the challenges that the global economy poses arising from “elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations and extreme weather conditions.”

He expects policy rates could stay higher for longer globally despite the pace of monetary tightening being scaled down. Outlook for global food prices and crude oil are also clouded by demand-supply uncertainties amid renewed geopolitical tensions.

RBI’s Outlook on Growth

Sudden spikes in the prices of vegetables, especially tomatoes have ruled headlines throughout the months of July and August courtesy uneven rainfall distribution and disruption in supply due to adverse weather conditions. 

Going by the past trends, the RBI is confident vegetable prices may see a significant correction after a few months. The RBI, however, believes going forward, vegetable inflation is likely to exert “sizeable upside pressures on the near-term headline inflation trajectory” and is hopeful this spurt would soften with fresh market arrivals. 

“It is important to be vigilant about these shocks with a readiness to act appropriately so as to ensure that their effects on the general level of prices do not persist,” the RBI said in its MPC statement.

Some positives reflect in data that suggests there is significant improvement in the progress of the monsoon and kharif sowing in July, optimism in household consumption, buoyancy in services, healthy corporate balance sheets, and robust government capital expenditure. 

The RBI projects the headline inflation for 2023-24 at 5.4% from 5.1% earlier. The CPI inflation expectation for the second quarter has been sharply increased to 6.2% to factor in the seasonal inflationary impact while the fourth quarter headline inflation expectation has been unchanged. Real GDP growth for 2023-24 is projected at 6.5% with Q1 at 8.0%.

The recent 250 basis points cumulative hike by the RBI is working its way into the economy, the RBI said, stating the MPC will maintain a close vigil on the evolving inflation scenario and is prepared to take the necessary actions required to anchor inflation expectations. 

Market Reaction

Majority of the market participants expected the RBI to maintain a pause on rates and view the sudden spike in inflation as transitory. 

Ajit Banerjee, chief investment officer at Shriram Life Insurance, said the MPC announcement can be construed as a dovish policy from the RBI as chances of any further rate hikes seemed remote, but RBI would keep an Arjuna’s eye for any adverse condition arising out of geopolitical concerns, crude oil price movements, food price movements globally or any other global uncertain event of large magnitude.

Gurvinder Singh Wasan, senior fund manager at JM Financial Asset Management, too thinks given the RBI’s stance, there is no visibility of rate cuts as of now. 

While many participants believe the RBI is striking a fine balance between growth and inflation, others believe inflation if persists is likely to impact the stock market in the near-to-mid term. 

Umeshkumar Mehta, chief investment officer of Samco MF, said “the outlook for Indian equities moderates further given that the election bell will start ringing which may start weighing down from next quarter. Overall, the macros and monetary policies will dampen investor sentiments and in-turn pause the equity rally going forward.”

Benchmark indices, both NIFTY 50 and BSE Sensex, fell more than half a percent led by rate-sensitive stocks including banks and automobiles.

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