 "Monetary policy: RBI holds repo rates again, cites food inflation risks")
In its 50th review of the monetary policy, the Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC) on Thursday decided to keep the repo rate unchanged at 6.5 per cent. It maintained the ‘withdrawal of accommodation’ policy stance for a ninth straight time, citing food inflation risks, and red-flagged ‘certain’ lenders not adhering to top-up loan norms and credit card spend growth staying high despite an increase in risk weightings.
External MPC members Jayanth Varma and Ashima Goyal continued to vote for a 25-basis-point cut in the repo rate and a change in stance to neutral.
“Headline inflation, after remaining steady at 4.8 per cent during April and May 2024, increased to 5.1 per cent in June, primarily driven by the food component, which remains stubborn,” RBI Governor Shaktikanta Das said while explaining the policy decision. He emphasised it was important for the monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof.
HDFC Bank’ treasury research team said in a note that the overall tone of the policy “seemed hawkish, with the RBI highlighting the risks around the stickiness in food inflation”.
Even as it kept the FY25 growth and inflation projections unchanged at 7.2 per cent and 4.5 per cent, respectively, the central bank raised the July-September inflation projection from 3.8 per cent to 4.4 per cent.
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“On inflation, the near-term upward revision has been offset by a downward revision for Q4, implying the food price shock is seen as transitory,” said Sonal Verma, managing director and chief economist (India and Asia ex-Japan) at Nomura. The inflation figures for the January-March quarter of FY24 were revised from 4.5 per cent to 4.3 per cent.
Growth numbers for the June quarter were also lowered from 7.3 per cent to 7.1 per cent. Das said this was due to updated information on certain high-frequency indicators showing lower than anticipated corporate profitability, general government expenditure and core industry output.
On the downgrade revision of the Q1 GDP growth figures (from 7.3 per cent to 7.1 per cent) on account of weak high-frequency indicators, Nomura’s Varma said this was “a surprise, since the RBI has so far been raising its growth forecasts, so it is acknowledging softer numbers incrementally”. The rate-easing cycle is expected to begin from October with a 25-bp cut, “as both inflation and growth surprise on the downside”, she added.
The next review of the monetary policy is scheduled for October 7-9.
The HDFC Bank note said a pivot in the December policy was not completely off the table. “If indeed, monsoon progress remains healthy and food inflation shocks are contained and are not persistent, space might open up for some policy accommodation by the RBI,” it said.
On the recent volatility in the financial market, primarily due to recession fears in the United States, Das reminded market participants of the strength of India’s macroeconomic fundamentals, “which remain robust”.
“India has built strong buffers that impart resilience to the domestic economy from such global spillovers. The RBI remains committed to ensuring orderly evolution of financial markets in its regulatory domain,” Das said.
While the monetary policy decisions were on expected lines, Das drew banks’ and non-banking financial companies’ attention to financial-stability issues. Observing that banks were taking greater recourse to short-term non-retail deposits to fund credit, he said such a practice might potentially expose the banking system to structural liquidity issues. “Banks may, therefore, focus more on mobilisation of household financial savings through innovative products and service offerings and by fully leveraging their vast branch networks.”
Das also said certain regulated entities were not adhering to norms for top-up housing loans, which were growing at a ‘brisk’ pace. “It is noticed that the regulatory prescriptions related to loan-to-value ratio, risk weightings and the monitoring of end use of funds are not being strictly adhered to by certain entities,” he said.
Watch Key highlights: RBI Monetary Policy Committee keeps repo rate unchanged at 6.5%