The Reserve Bank of India (RBI) has extended the pause on key policy rates for a sixth consecutive time, leaving the repo rate untouched at 6.5%.

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

The policy stance was maintained at ‘withdrawal of accommodation’, adding that the transmission of the rate hikes undertaken till date was incomplete.

The monetary policy must continue to be actively disinflationary, RBI Governor Shaktikanta Das said.

The six-member rate-setting monetary policy committee (MPC) had one dissent vote on the rate decision backing a cut as well as stance.

“Strong growth momentum this year as well as next year, above-target inflation and anticipation of firmer service demand have convinced the central bank to leave the rates unchanged and maintain a cautious stance,” said Radhika Rao, executive director and senior economist at DBS Group Research.

Inflation projected lower at 4.5% for FY25

The RBI is more guarded on inflation and prefers to persevere with the hawkish stance to ensure that the ‘last mile disinflation’ materialises.

The central bank has maintained its CPI (consumer price index) inflation forecast at 5.4% for 2023-24.

The prediction is that this will ease to 4.5% in FY25, assuming a normal monsoon. The forecast for the first quarter of FY25 is 5% while Q2 would be 4%, Q3 4.6% and Q4 4.7%. 

“Keeping inflationary expectations anchored and taking inflation towards the 4% target on a sustainable basis are in focus, suggesting a dovish pivot is not imminent. Market pricing for rate easing might be further pushed out. To the central bank’s comfort, the interim budget was non-inflationary, adhering to the fiscal consolidation path and avoiding significant demand-accretive measures,” said Rao.

While retaining the inflation forecast for FY24, the RBI has preferred to stay cautious and mentioned of two-way risks. These stem from adverse weather events and volatile crude oil prices. On the positive end, the evolving food outlook will be important with rabi crop faring better than last year, ongoing seasonal correction in vegetable prices and effective supply management efforts. 

The RBI Governor said that the MPC remained resolute on containing inflation at target of 4%.

GDP at 7% for FY25

The central bank has pegged the GDP growth estimate at 7% for FY25 as the momentum of economic activity is expected to continue. 

Strong growth is allowing the RBI the room to stay on an extended pause.

The GDP forecast for Q1FY25 has been raised to 7.2% from the earlier 6.7%; Q2FY25 to 6.8% from 6.5%; Q3FY25 to 7% from 6.4%; and Q4FY25 GDP to 6.9%.

The key sources of strength are seen in:

a) farm output from a recovery in rabi sowing, sustained profitability in manufacturing and underlying resilience of services; 

b) positive on consumption and fixed investment owing to an increase in the private capex cycle, healthier balance sheets and government’s capex thrust; 

c) trade to benefit from a pickup in global trade and rising integration in global supply chain.

Liquidity management to be two-way

Liquidity management will be two-way, with emphasis on being nimble and pre-emptive.

Notably, systemic liquidity shifted to a deficit in September 2023 after four-and-a-half years. However, potential liquidity in the banking system remains surplus after accounting for government cash balances, said Das.

The rate-hiking cycle took place against the backdrop of abundant liquidity which has since reversed. “This necessitates liquidity management to be two-way to keep the banking system in a mild deficit to align with the overall anti-inflation stance,” said Rao. 

The deficit in the banking system narrowed to less than Rs 1.5 trillion this week on higher government spending, compared to over Rs 2.5-3 trillion shortfall in second half of January 2024. In reaction, the central bank intensified its operations to remove liquidity via market operations, as the interbank rate fell below the benchmark repo rate. 

“These contrasting moves mark a departure from repo operations to infuse liquidity last month, suggesting a hesitation to lower their guard on inflation and preference to keep the interbank rate above the repo rate, rather than close to the SDF rate. Active intervention is likely to anchor overnight rates,” said Rao.