RBI Holds Key Rates Steady, Projects Robust GDP Growth, and Eyes Inflation Dynamics in FY24-FY25

The Reserve Bank of India (RBI) has announced its decision to maintain the key lending rate (repo rate) at 6.5%, with a focus on the ‘withdrawal of accommodation’ stance. RBI Governor Shaktikanta Das stated that this decision, supported by five out of six committee members, is influenced by the ongoing transmission of the cumulative 250 bps policy rate hike.

Governor Das emphasized the need to carefully monitor signs of generalization of food price pressures to prevent undermining the gains in easing core inflation. Despite the pro-active supply-side measures by the government, he urged vigilance against new supply shocks that could disrupt progress. The MPC revised the FY24 real GDP growth projection to 7.3% from 7%, with FY25’s projection set at 7%, anticipating the momentum in economic activity to continue.

Inflation projections were maintained at 5.4% for FY24, while FY25’s projections were set at 4.5%. The MPC foresees inflation for Q1 FY25 at 5%, Q2 at 4%, Q3 at 4.6%, and Q4 at 4.7%. Governor Das acknowledged concerns about elevated levels of public debt in various economies, including advanced ones, highlighting the uncertainties introduced by wars and conflicts.

Market expectations aligned with experts predicting the MPC’s decision to keep key rates unchanged. India’s retail inflation for December 2023 stood at 5.7%, exceeding the RBI’s comfort level of 4%. Some analysts, such as those from SBI Ecowrap, anticipate the continuation of the pause stance, with the possibility of the first rate cut around June or August 2024. Ajit Kabi, a research analyst at LKP Securities, expects the RBI to support economic growth cautiously, possibly shifting its stance to NEUTRAL and implementing liquidity improvement measures by June 2024.

Pankaj Pathak, Fund Manager-Fixed Income at Quantum AMC, argues for a change in the RBI’s stance from ‘withdrawal of accommodation’ to ‘neutral,’ considering tightened financial conditions and increasing real rates. However, Madan Sabnavis, chief economist at Bank of Baroda, believes that maintaining the call rates corridor between the repo and Marginal Standing Facility (MSF) rates indicates a continuation of the withdrawal of liquidity position, contrary to some market expectations.