RBI keeps policy rate unchanged at 6.5% but more MPC members want a cut; Inflation outlook at 4.5%, GDP growth at 7.2%

The Reserve Bank of India (RBI) left its key interest rates unchanged on Friday as expected, keeping the focus on inflation amid robust economic growth that is likely to provide the new Modi government headroom for manoeuvring reforms.

The Monetary Policy Committee kept the repo rate unchanged at 6.50 per cent for an eighth straight policy meeting and stuck to its relatively hawkish stance of “withdrawal of accommodation”, Governor Shaktikanta Das said in his statement.

However, there were signs of a more divided policy committee, with one additional member voting for a softening in stance as well as policy direction. Two external members, Ashima Goyal and Jayanth Varma, voted for a cut, compared to one in the previous meeting.

With the Indian economy, Asia’s third-largest, growing faster than expected in the previous year, the RBI raised its GDP growth projection for the current fiscal through March 2025 to 7.2 per cent from 7 per cent while maintaining its inflation forecast at 4.5 per cent.

India’s real GDP grew by 8.2 per cent in the 2023-24 (April 2023 to March 2024) fiscal year, while inflation was 4.83 per cent in April, above the RBI’s target. The FY24 growth was helped by a faster-than-expected pace of 7.8 per cent in the March quarter.

Das said while the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation.

“Monetary policy must continue to remain disinflationary and be resolute in its commitment to aligning inflation to the target of 4.0 per cent on a durable basis,” he said.

“Sustained price stability would set strong foundations for a period of high growth.” The RBI, he said, will continue to be nimble and flexible in its liquidity management through fine-tuning operations in repo and reverse repo. “We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner, which preserves financial stability.” The governor hinted that the RBI may be willing to move before the US Federal Reserve pivots a rate cut, saying the central bank’s monetary policy actions are determined by domestic growth and inflation conditions.

“I’d like to unambiguously state while we do keep a watch on whether clouds are building up or clearing out in the distance horizons, we play the game according to the local weather pitch conditions,” he said.

Commenting on the MPC decisions, Radhika Rao, Executive Director and Senior Economist, DBS Bank, said there were signs of a more divided policy committee, with one additional member voting for a softening in stance.

“The majority retained their cautious stance to guide inflation towards the 4 per cent target on a durable basis, despite recent signs of disinflation.” “The MPC also signalled that they will not react to the upcoming base-effect-driven correction in inflation in 2Q FY25, lowering the probability of a shift in 2H 24. In all, the mix of strong growth and above-target inflation does not make a case for a shift to a less restrictive policy setting yet, validating our view that rate easing is not on the cards this year. Political developments are not expected to sway the monetary policy direction or outlook,” she said. — PTI