The Good
- Stability for Borrowers: By keeping the repo rate unchanged at 6.5%, borrowers with loans linked to the repo rate benefit as their equated monthly installments (EMIs) on home and personal loans remain stable.
- Economic Growth: The RBI has revised its GDP growth projection for FY25 upwards to 7.2%, reflecting strong domestic economic activity and improved demand conditions.
- Manufacturing and Services Sector Strength: The eight core industries posted healthy growth, and the PMI for manufacturing and services indicates continued expansion, suggesting a robust economic environment.
- Positive Market Reaction: The stock market responded positively to the GDP growth forecast hike, with the Sensex rising nearly 1%, signaling investor confidence in the economy.
The Bad
- Persistent Inflation: Inflation remains above the RBI’s 4% target, driven by high food prices due to ongoing heatwave conditions. This persistent inflation could erode consumers’ purchasing power, particularly impacting lower-income households.
- Dissent Within MPC: The decision to keep the repo rate unchanged was not unanimous, with two members voting for a rate cut. This split highlights differing views within the MPC on balancing growth and inflation, adding uncertainty to future policy directions.
- Potential Loan Rate Increases: While repo rate-linked loans remain stable, lenders might increase interest rates on loans tied to the MCLR, leading to higher borrowing costs for some consumers and businesses.
- Tight Liquidity Conditions: The RBI’s stance of ‘withdrawal of accommodation’ indicates tight liquidity conditions, with a banking system liquidity deficit in May 2024. This could constrain credit availability and put upward pressure on short-term yields.
The Gist
- Repo Rate Unchanged: The RBI has maintained the repo rate at 6.5% for the eighth consecutive time, citing ongoing inflationary pressures, particularly from food prices.
- GDP Growth Projection Raised: The central bank has revised its GDP growth forecast for FY25 from 7% to 7.2%, driven by strong domestic economic activity and improving demand conditions.
- Cautious Policy Stance: The decision reflects a cautious approach, with the RBI balancing the need for economic growth against the imperative of controlling inflation. The MPC vote was split, with two members advocating for a rate cut.
- Market and Borrower Impact: The stock market reacted positively to the growth forecast, while borrowers with repo rate-linked loans benefit from stable EMIs. However, potential increases in MCLR-linked loan rates could pose challenges for some borrowers. Tight liquidity conditions and ongoing inflation concerns remain key issues for the RBI moving forward.
The Take
The RBI’s unchanged repo rate reflects a cautious approach to balancing economic growth with inflation control. Despite the upbeat GDP growth projection, inflation remains a key challenge, influenced by weather-related disruptions. The decision’s split vote indicates differing views within the MPC on the immediate need for rate adjustments. The financial markets’ positive reaction to the growth forecast underscores investor confidence in India’s economic resilience. However, the broader economic landscape remains nuanced, with ongoing inflationary pressures and tight liquidity conditions requiring careful monitoring by policymakers. The RBI’s future decisions will likely hinge on the evolving inflation scenario and external economic factors, including global monetary policies and domestic fiscal measures.
The Reserve Bank of India (RBI) has opted to maintain the repo rate at 6.5% for the eighth consecutive time, underscoring a cautious approach in its monetary policy amid persistent inflationary pressures. This decision, made during the Monetary Policy Committee (MPC) meeting held from June 5 to 7, 2024, reflects the central bank’s focus on balancing the need for economic growth with the imperative of controlling inflation.
Persistent Inflationary Pressures
Inflation remains a significant concern for the RBI. Despite a slight decrease, India’s retail inflation rate was recorded at 4.83% in April 2024, down marginally from 4.85% in March 2024. This is still above the central bank’s medium-term target of 4%, largely due to sustained pressures from food prices. The overall tone of the policy announcement remained cautious, with the RBI highlighting the risks of upside inflation due to ongoing heatwave conditions impacting food supply. This persistent inflation is a critical factor in the MPC’s decision to keep the repo rate unchanged, as reducing rates could potentially exacerbate inflationary pressures.
Economic Growth Prospects
Contrasting with its inflation concerns, the RBI has revised its GDP growth projection for the fiscal year 2024-25 from 7% to 7.2%. This upward revision is based on improving demand conditions in both rural and urban areas, as well as strong performances in the manufacturing and services sectors. RBI Governor Shaktikanta Das emphasized that domestic economic activity has shown resilience, with the manufacturing sector gaining ground due to strengthening demand. The eight core industries posted healthy growth in April 2024, and the Purchasing Managers Index (PMI) for manufacturing remained robust in May 2024, indicating continued expansion. This optimistic growth outlook has been positively received by financial markets, with the Sensex rising nearly 1%, or over 700 points, following the policy announcement.
MPC Voting Dynamics
The decision to keep the repo rate unchanged was not unanimous within the MPC. Of the six members, two — Ashima Goyal and Jayanth Varma — voted to reduce the repo rate by 25 basis points to 6.25% and also advocated for a change in the monetary policy stance to neutral. This dissent within the committee highlights the differing perspectives on how best to balance growth and inflation. While the majority favored maintaining the status quo to keep inflation in check, the minority argued for a rate cut to support economic growth further.
Implications for Borrowers
For borrowers, the RBI’s decision to hold the repo rate steady is a mixed bag. On one hand, it means that the equated monthly installments (EMIs) on loans linked to the repo rate, such as home and personal loans, will not increase, providing some financial relief. On the other hand, lenders may still raise interest rates on loans tied to the marginal cost of fund-based lending rate (MCLR), where the full transmission of past repo rate hikes has not yet occurred. This could lead to higher borrowing costs for some consumers and businesses, adding to their financial burden.
Tight Liquidity Conditions
The RBI’s policy stance of ‘withdrawal of accommodation’ remains unchanged, indicating its continued focus on tightening liquidity conditions to manage inflation and support the rupee. In May 2024, the average liquidity in the banking system was in deficit, with a shortfall of ₹1.42 lakh crore, compared to a surplus in April 2024. This shift is partly attributed to limited government spending during the general elections, which reduced liquidity in the system. The RBI’s tight liquidity stance aims to maintain pressure on short-term yields, which could help stabilize the rupee but may also constrain credit availability.
Future Rate Cut Expectations
Looking ahead, the RBI’s next moves will be closely watched. Analysts expect the central bank to monitor the progress of the monsoon season, which is crucial for agricultural output and food prices. Additionally, the Union Budget, likely to be presented in July, will provide further insights into the government’s fiscal policy and spending plans. Some analysts, such as those from Goldman Sachs, have pushed their expectations for an RBI rate cut to the fourth quarter of 2024, anticipating a shallow easing cycle with a total of 50 basis points in cuts over Q4 2024 and Q1 2025.
Stock Market Reaction
The financial markets reacted positively to the RBI’s GDP growth forecast hike. The Sensex’s nearly 1% rise indicates investor confidence in India’s economic prospects. This boost reflects optimism about future corporate earnings and economic activity, driven by strong domestic demand and robust performances in key sectors.
Conclusion
The RBI’s decision to keep the repo rate unchanged at 6.5% underscores a delicate balancing act between fostering economic growth and controlling inflation. While the upward revision of the GDP growth forecast to 7.2% for FY25 reflects a positive economic outlook, persistent inflation, particularly in food prices, remains a significant challenge. The mixed implications for borrowers and tight liquidity conditions further complicate the economic landscape. As the RBI navigates these challenges, its future policy decisions will likely hinge on evolving inflation trends, the progress of the monsoon season, and fiscal measures outlined in the upcoming Union Budget. The cautious stance of the RBI, coupled with its commitment to managing inflation, indicates that it will proceed with measured steps in its monetary policy approach.
