The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in its December review meeting has unanimously decided to keep the policy repo rate unchanged at 6.5 per cent, thus maintaining status quo for the fifth straight time. Deliberating the policy statement on December 8, RBI Governor Shaktikanta Das attributed declining inflation as the reason behind the status quo. Taking into account the economic factors, the MPC has predicted GDP growth at 7 per cent in FY24. As regards the inflation rate, the MPC forecast was 5.4 per cent for 2023-24 taking into account the various domestic issues, including potential agricultural produce.
The repo rate is the rate of interest at which RBI lends to other banks. The RBI typically conducts six bimonthly meetings in a financial year, where it deliberates interest rates, money supply, inflation outlook, and various macroeconomic indicators. For the fourth straight occasion, the monetary policy committee, through its October review meeting, unanimously decided to keep the policy repo rate unchanged at 6.5 per cent, thus maintaining the status quo. In its past four meetings, it held the repo rate unchanged at 6.5 per cent.
A relative decline in inflation, barring the latest spike, and its potential for further decline may have prompted the central bank to put the brake on the key interest rate. Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well. Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
The latest monetary policy statement of RBI had a lesser hawkish undertone compared to the preceding October statement. Clearly, RBI is more optimistic on the domestic growth prospects after the release of GDP data for the second quarter which placed GDP growth for H1 at 7.7 per cent year-on-year. The upward revision of the GDP growth forecast for FY24 to 7 per cent, coupled with the absence of any reference to future OMO (open market operations) sales, represents a favourable development for both the economy and the markets.
So the intensity of hawkishness in the RBI policy statement has clearly subsided and a balance has been brought in. On inflation, despite risks on account of patchy perishables, the MPC outlook is unchanged at 5.4 per cent for FY24. The rate cut perhaps may happen during the first quarter of FY25 which would be data dependent. However, 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.