The Reserve Bank of India (RBI) has kept the policy repo rate unchanged for the second time in a row at 6.50% amid moderation in inflation. 

 The central bank also retained the GDP growth forecast for FY24 at 6.5% and retail inflation at 5.1%.

For the second time in this financial year, the RBI’s Monetary Policy Committee (MPC) decided to press the pause button on the repo rate. The RBI paused the rate increase cycle in April, after six consecutive rate hikes amounting to 250 basis points since May 2022, 

The Standing Deposit Facility Rate also remains at 6.25% and the Marginal Standing Facility Rate and Bank Rate unchanged at 6.75%.

Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das today said the MPC unanimously decided to keep the rate unchanged at 6.5%.

The MPC, which met for three days, voted five members to one to remain focused on withdrawal of accommodation in order to keep inflation in check.

Inflation at 5.1% for FY24

The RBI expects retail inflation for FY24 to be at 5.1%. The breakdown of CPI (consumer price index) inflation is as follows: 4.6% for Q1FY24; 5.2% at Q2FY24; 5.4% at Q3FY24; and 5.2% at Q4FY24.

While keeping the interest rate intact, Das said headline inflation still remains above RBI's target of 4% and is expected to stay so during the rest of the year.

The RBI Governor said retail inflation has been below the upper band of 6% for the last two years.

While the RBI recognised the near-term easing in inflationary pressures, it was being cautious about the future trajectory.

“The central bank lowered its inflation forecast only marginally to 5.1% (from earlier estimate of 5.2%) and seems to be building in a buffer for any food prices spikes due to weather related disturbances during the monsoon season. If indeed these risks do not pan out, inflation could be lower than the RBI’s projections leading to subsequent communications becoming more dovish,” said Abheek Barua, chief economist at HDFC Bank.

GDP forecast retained at 6.5% for FY24

On a quarterly basis, the RBI projected GDP growth rate at 8% in Q1FY24; 6.5% in Q2FY24; 6% in Q3FY24; and 5.7% in Q4FY24.

Impact of the RBI pause

With the RBI deciding to keep the repo rate unchanged for the second consecutive time, there could be a boost in demand for credit and the interest rate cycle could stabilise. 

“With global macro anyways pulling businesses down, RBI’s action will provide much-needed support to local demand and growth. I expect interest rate stability will boost capex plans, the bulk of which has so far been driven by the government. The multiplier effect of Investment spending is much higher than that of consumption spending,” said Anu Aggarwal, president and head of corporate banking, at Kotak Mahindra Bank.

Bankers have said that the pause on the rate front and no change in the stance of the policy were on the expected lines. The RBI has also not let the guard down on the inflation front.

“RBI has kept the rates and stance unchanged in line with the market expectations in view of easing retail inflation and anticipation of a further decline. Maintaining the growth projection of GDP for FY24 at 6.5% reflects that RBI remains sanguine about the economic growth projections. Reduction of the Inflation projection for FY24 also indicates optimism,” Punjab National Bank managing director and CEO Atul Goel said.

State Bank of India chairman Dinesh Khara welcomed the nuanced communication tailored to anchor market expectations for the future in terms of a durable glide path of inflation.

 “The bouquet of policy changes on the development front covers a wide spectrum and prioritises resolution, risk management and digital innovation, and addresses issues relating to market microstructure. Overall, the policy is an apt statement in the backdrop of a global economy that is still mired in growth-related uncertainties and labour market rigidities,” Khara said.