 "RBI keeps repo rate unchanged, hikes FY25 GDP growth forecast: Details here")
In its second meeting for FY25 and the first after the general elections, the Reserve Bank of India (RBI) announced on Friday that the benchmark repo rate will remain unchanged at 6.5 per cent for the eighth consecutive time. The decision was taken by the RBI's six-member Monetary Policy Committee (MPC) by a 4:2 majority.
The MPC, headed by RBI governor Shaktikanta Das, also decided to continue its stance of 'withdrawal of accommodation'.
The RBI raised its GDP growth forecast for FY25 to 7.2 per cent from 7 per cent earlier, while the inflation forecast was retained at 4.5 per cent.
Speaking about the disinflationary trend in the core Consumer Price Index (CPI) inflation for the 11th consecutive month, Das highlighted that high food inflation offset the overall gains.
However, assuming a normal monsoon based on the weather department's forecasts, Das said that the CPI for FY25 is projected at 4.5 per cent. The quarter-wise breakups for CPI given by Das are 4.9 per cent in the first quarter, 3.9 per cent in the second quarter, 4.6 per cent in the third quarter, and 4.5 per cent in the fourth quarter.
Key highlights of the June RBI MPC meeting
- Benchmark repo rate unchanged at 6.5 per cent for the eighth consecutive time by a 4:2 majority.
- Continuation of the 'withdrawal of accommodation' stance by RBI.
- Increase in GDP growth forecast for FY25 to 7.2 per cent from 7 per cent earlier.
- The inflation forecast for FY25 is kept at 4.5 per cent.
- Overall, the financial sector's health remains robust, backed by asset quality and a rise in profitability in the banking and Non-Banking Financial Companies (NBFC) segments. A few outliers persist for the RBI to watch out for, but there is no big problem at the moment.
- Proposal for setting up a Digital Payments Intelligence Platform for network-level intelligence and real-time data sharing across the digital payments ecosystem.
- The surge in Foreign Portfolio Investor (FPI) flows during FY24, with an inflow totalling $41.6 billion.
What did the RBI governor Shaktikanta Das say?
On GDP growth: "The developments with respect to growth and inflation are unfolding as per expectation. When the projected growth of 7.2 per cent for FY25 materialises, it will be the fourth consecutive year of growth at or above 7 per cent for India."
On inflation: "Headline CPI continues to be on a disinflationary trajectory. Monetary policy has played a key role. Between Q4FY24 and Q1FY25, headline inflation has declined by 2.3 percentage points. Repeated food price shocks have slowed down the overall decline in inflation."
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The RBI governor further said that "the central bank is committed to bringing inflation back to the target of 4 per cent on a durable basis."
On the Current Account Deficit (CAD): Saying that the CAD moderated in Q4 FY24, Das said, "the current account deficit is expected to remain well within its sustainable level in FY25."
On private consumption: Das said that private consumption is recovering with steady discretionary spending in urban areas. He added that investment activity continues to gain traction.
On FPI inflows in FY25: Informing that the FPI flows surged in FY24, Das said that the FPIs had turned net sellers in FY25. "Foreign Portfolio Investors have turned net sellers in the domestic market since the start of FY25 with net outflows of $5 billion till June 5."
On growing digital frauds: Speaking about the growing cases of digital fraud, Das noted that there is a need for a system-wide approach to prevent and mitigate such fraud. "It is therefore proposed to set up a Digital Payments Intelligence Platform for network-level intelligence and real-time data sharing across the digital payments ecosystem. The RBI has constituted a committee for setting up this platform," he added.
What is the RBI's Monetary Policy Committee?
The RBI MPC is entrusted with the responsibility of monetary policy in India. Its primary objective is maintaining price stability while considering growth. The body was constituted in 2016 and is required to meet at least four times a year.
The June FY25 meeting was the RBI's 49th MPC meeting. The committee has six members: Das, Shashanka Bhide, Ashima Goyal, Jayanth R Varma, Rajiv Ranjan, and Michael Debabrata Patra. They have been members since October 2020.
Each member of the MPC has one vote, and in the event of a tie, the governor has a second or casting vote.
Besides the central bank's governor, the committee members include a deputy governor of the RBI (Patra), one officer of the RBI to be nominated by the central board (Rajiv Ranjan), and three other economists appointed by the Centre: Goyal, Varma, and Bhide.
According to the rules, external members are required to hold office for four years or until further orders.
The RBI MPC implements its monetary policy mainly through the benchmark repo rate. However, in addition to the repo rate, the committee uses several other instruments, such as the reverse repo rate, cash reserve ratio checks, banks' assets in India, and open market operations (the outright purchase/sale of government securities by the RBI).
What is the withdrawal of accommodation stance?
Withdrawal of accommodation refers to the RBI's gradual reduction in the level of monetary stimulus it has been providing to the economy. This stimulus, also known as accommodation, was introduced during the Covid-19 pandemic to support economic recovery and mitigate the impact of lockdowns and other restrictions.
The RBI's monetary policy committee (MPC) has been gradually withdrawing this accommodation to ensure that inflation remains within the target range and to prevent the economy from overheating. The central bank has maintained its hawkish stance of "withdrawal of accommodation" since June 2022.
How is 'withdrawal of accommodation' implemented?
The RBI implements the withdrawal of accommodation through various monetary policy tools, including setting the repo rate high, which is the rate at which it lends money to commercial banks. By increasing the repo rate, the RBI makes borrowing more expensive, thereby reducing the money supply and curbing inflationary pressures.
The RBI can also reduce the amount of liquidity in the system by selling government securities, which reduces the money supply and increases borrowing costs.
Through open market operations, the RBI can also buy or sell government securities to influence the money supply and interest rates.
How has inflation behaved against the repo rates?
Headline retail inflation remained largely unchanged at 4.83 per cent in April this year, down from 4.85 per cent in March.
But food inflation increased to 8.7 per cent in April 2024 from 8.52 per cent in March.
Since February 2023, when the central bank last increased the repo rate to 6.5 per cent from 6.25 per cent, food inflation has been a persistent problem, or as the RBI has repeatedly called it, "sticky." While the core CPI inflation has remained stagnant or at least not strayed too far from the RBI's target, hovering between 5 and 4.8 per cent since August last year, food inflation has remained north of 8.7 per cent since August last year.
Meanwhile, Governor Das has pinned his hopes on a normal monsoon forecast this year, which will cool down vegetable prices and boost kharif production.