The Reserve Bank of India (RBI) has hit the pause button and kept the repo rate unchanged at 6.50%, implying that prices of home and other loan products would not go up.

There is no signal from the RBI that the rate hike has peaked and would go on a slide from here on. If inflation continues to show upward trends, the central bank would go back to increasing interest rates.

The cautionary note came from the RBI Governor itself. The withdrawal of accommodation and the repo rate hike has been paused only for this meeting, RBI Governor Shaktikanta Das emphasised while announcing the monetary policy.

While it was generally expected that the RBI would increase interest rates after the Federal Reserve in the US and other central banks in Europe hiked theirs, the battle became close towards the time of policy announcement and some even predicted the monetary policy committee (MPC) would press the pause button. The thinking inside the rate-setting committee was that the interest rates were hurting and growth was becoming an issue. 

The standing deposit facility (SDF) rate will also remain unchanged at 6.25% and the marginal standing facility (MSF) rate and the bank rate at 6.75%.

This is the first credit policy announcement in the current financial year.

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 with the target, while supporting growth.

What led to the MPC’s decisions on the policy rate? “While the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns,” Das said.

“Headline inflation is moderating but remains well above the targets of central banks. These developments have led to heightened volatility in global financial markets as reflected in sizeable two-way movements in bond yields,” he added.

Amidst this volatility, the banking and non-banking financial service sectors in India remain healthy and financial markets have evolved in an orderly manner.

“Economic activity remains resilient and real GDP growth is expected to have been 7% in 2022-23. Consumer price inflation, however, has increased since December 2022, driven by price pressures in cereals, milk and fruits. Core inflation remains elevated,” the RBI Governor said.

The monetary policy actions taken since May 2022, which has raised the repo rate by 250 basis points, were working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far while closely monitoring the evolving inflation outlook, Das said.

“The MPC will not hesitate to take further action as may be required in its future meetings,” he emphasised.

The repo rate is the key lending rate through which the RBI lends money to commercial banks against government securities.

GDP forecast raised to 6.5% in FY24

The Reserve Bank has raised the gross domestic product (GDP) growth forecast by 10 basis points to 6.5% in FY24. The central bank had earlier pegged GDP growth for FY24 at 6.4%.

According to Das, the protracted geopolitical tensions and global financial market volatility pose downside risks to the outlook. Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 6.5%, with Q1 at 7.8%; Q2 at 6.2%; Q3 at 6.1%; and Q4 at 5.9%. The risks are evenly balanced, he said.

In its previous meeting, the MPC had forecast India's GDP in Q1 to grow at 7.8%; Q2 at 6.2%; Q3 at 6% and Q4 at 5.8%.

The RBI has brought down inflation projection to 5.2% in FY24, from 5.3% forecast earlier.

Das said the rising uncertainty in international financial markets and imported inflation pressures need to be monitored closely.

Taking into account various factors and assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon, CPI inflation is projected to moderate to 5.2% for 2023-24; with Q1 at 5.1%; Q2 at 5.4%; Q3 at 5.4%; and Q4 at 5.2%. The risks are evenly balanced.