RBI’S Monetary Policy Committee (MPC) Meet: Rates and Stance Unchanged
STORIES, ANALYSES, EXPERT VIEWS
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) Thursday decided to keep its key interest rate and stance unchanged keeping the policy decision expected lines. The MPC, led by Governor Shakitkanta Das also sticks to the 'withdrawal of accommodation' stance of the monetary policy. "MPC judged that it is important for monetary policy to stay the course while maintaining close vigil on risks," Das said while announcing the policy decision.
The Committee, which consists of three RBI and three external members met from August 5-7 and in a 4:2 ratio arrived at a decision to hold the repo rate unchanged at 6.50 per cent for the ninth straight time.
While four members of the committee were in favour of maintaining status quo, Dr. Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points, the RBI said.
Caution on Inflation
Governor Shaktikanta Das emphasized that the RBI cannot become complacent despite the drop in core inflation. The MPC must remain vigilant to prevent spillovers or second-round effects from persistent food inflation. The divergence between headline and core inflation necessitates continued caution, especially in an environment of high food prices.
Das noted that headline inflation increased to 5.1% in June, primarily driven by the food component, while the fuel component in the CPI basket remained in deflation. He warned that the expected moderation of headline inflation is likely to reverse in the third quarter. However, resilient and steady GDP growth allows monetary policy to focus clearly on inflation, ensuring price stability which eventually supports a period of sustained growth.
Food inflation a cause for concern: Governor Shaktikanta Das stated that while the MPC may overlook temporary spikes in food inflation, persistent high food inflation cannot be ignored due to its potential spillover effects. He highlighted that the public often perceives inflation primarily through food prices.
Projected inflation: The RBI MPC projected inflation forecast for FY25 unchanged at 4.5 per cent, while it stands at 4.4 per cent for FY26.
Inflation for Q2 has been hiked to 4.4 per cent from 3.8 per cent; Q3 projection raised to 4.7 per cent from 4.6 per cent and finally Q4 projection eased to 4.3 per cent from 4.5 per cent.
MPC stays resolute in its commitment to aligning inflation to the 4 per cent target on a durable basis, RBI Guv said.
GDP forecast
The real GDP forecast for FY25 was kept unchanged at 7.2% with Q1 slightly reduced to 7.2 per cent; Q2 at 7.2 per cent; Q3 at 7.3 per cent; and Q4 at 7.2 per cent
The real GDP for Q1FY26 is also projected at 7.2 per cent.
Moderation in Q1FY25 growth forecast is due to updated information on certain high frequency indicators.
Current account deficit
India’s current account deficit (CAD) moderated to 0.7 per cent of GDP in 2023-24 from 2.0 per cent of GDP in 2022-23 due to a lower trade deficit and robust services and remittances receipts.
MSF and SDF
The Marginal Standing Facility (MSF) and Standard Deposit Facility (SDF) rates remain steady at 6.75% and 6.25%, respectively.
Public repository for digital lending apps proposed
The RBI has proposed a public repository for digital lending apps to tackle issues with unauthorized platforms. Regulated entities must report their digital lending apps to the RBI for better oversight. Additionally, the UPI-based tax payment limit has been raised from Rs 1 lakh to Rs 5 lakh per transaction.
Forex reserves hit $675 billion
Net Foreign Direct Investment (FDI) inflows doubled in the April to June 2024 quarter compared to the previous year. India's foreign exchange reserves reached a record $675 billion as of August 2, 2024. The RBI's two-way Liquidity Adjustment Facility (LAF) operations in June and July aligned overnight rates with the repo rate.
Analyses: fixation on inflation, but rising borrowing costs
The thrust on inflation and taming it at the desired 4 percent mark, in the view of Hamsini Karthik (Deputy Editor, Hindu BusinessLine) “remains the most important agenda and for reasons beyond control, an unfinished agenda as well. Emphasising that the central bank will not follow the footsteps of its global peers, Das said that considering the stubbornness of inflation is primarily due to food component, repo rate will remain unchanged for the ninth time at 6.5 percent.”
‘The commitment of monetary policy to ensure price stability would strengthen the foundations for a sustained period of high growth. Hence, the MPC reiterated the need to continue with the disinflationary stance of withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,’ the RBI Governor said in his speech.
In several other instances during the speech, the governor clearly stated that growth will not be compromised in the process of battling inflation.
But, asks Karthik “who will bear the cost of growth?
“Banks play a perfect proxy when it comes to gauging growth, which presently is more consumption led. Data from RBI indicates that capacity utilisation in manufacturing sector stood at 76.8 percent in the March FY24 quarter, which is the highest in 11 years. It could be a precursor for a return of capex….
The question however, “is whether corporates will continue to borrow at any cost. Most banks argue that interest rates are never the primary determining factor for corporates while vetting their liability plans. But the fact that banks (especially those primarily catering to large and mega sized corporates) have been extremely cautious about jacking up MCLR (marginal cost of fund based lending rate) suggests that a steep hike in corporate loan rates may dampen growth in the segment…..”
Therefore, “in the context of an improving capex, the question is whether a rate cut can prove a critical element in sprucing up demand from corporates and also provide a helping hand to banks on the deposits front.”
Downside to a rate cut: Karthik supports a rate cut. But there is a downside to this argument. “A rate cut at this juncture to support capex may compound inflationary risks. No doubt then that the MPC is in a prolonged catch-22. However, with regulations getting tighter than before, financial institutions shouldn’t end up as the unintended victims of this situation – a problem that India shouldn’t face when it is the brightest growth spot in the global map.”
