Shaktikanta Das, Governor, RBI
The RBI maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of growth, Governor Shaktikanta Das said while announcing the MPC’s decision
“Our goal is to achieve the inflation target of 4% and keeping inflation within the comfort band of 2-6% is not enough,” Das said
India’s central bank kept its key lending rate steady for a second straight policy meeting on Thursday, as widely expected, but signalled that monetary conditions will remain tight for some time as it looks to further curb inflationary pressures.
The monetary policy committee (MPC), which has three members from the Reserve Bank of India (RBI) and three external members, kept the repo rate steady at 6.50% in a unanimous decision.
Earlier, the RBI had cumulatively hiked the repo rate by 250 basis points since May 2022 in a bid to contain inflation.
“Our goal is to achieve the inflation target of 4% and keeping inflation within the comfort band of 2-6% is not enough,” Governor Shaktikanta Das said while announcing the MPC’s decision.
“Headline inflation is projected to decline in 2023-24 from its level in 2022-23 but would still be above the target, warranting continuous vigil,” he said.
“Goal is to reach the targeted 4 per cent inflation going forward, our monetary policy actions are yielding desired results giving us space to keep rates unchanged in this meeting,” Das added.
The committee also kept the gross domestic product (GDP) growth projection for FY24 unchanged at 6.5 per cent. The projection for the first quarter (Q1) has been kept at 8 per cent, Q2 at 6.5 per cent, Q3 at 6 per cent and Q4 at 5.7 per cent.
Moreover, the MPC decided to lower the inflation projection for 2023-24 (FY24) to 5.1 per cent from 5.2 per cent earlier. Das said that the inflation is expected to remain above 5 per cent throughout FY24.
“The cumulative rate hike of 250 basis points undertaken by the MPC is transmitting through the economy and its fuller impact should keep inflationary pressures contained in the coming months. Monetary policy would need to be carefully calibrated for alignment of inflation with the target. Against this backdrop, the MPC decided to keep the policy repo rate unchanged at 6.50%,” he said.
The RBI maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of growth, Das explained.
The committee “will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target,” the MPC’s resolution said.
Churchil Bhatt, executive vice president & Debt Fund Manager, Kotak Mahindra Life Insurance Company said, “Today’s MPC decision of staying put on ‘rates’ and ‘policy stance’ is largely in line with market consensus. Despite the recent moderation in headline inflation, the Committee remains vigilant on inflation. The discomfort on inflation is arising from slower than expected fall in global inflation and possibility of ‘El Nino’. As a result, the committee has only marginally revised down its FY24 CPI inflation projection by 10 bps to 5.1%. On the other hand, the committee derives comfort from robust economic growth.”
Overall, the MPC remains non-committal on a ‘policy pivot’ and has left the room open for ‘long policy pause’, as it aims for a CPI target of 4% on a durable basis. Now that this expectedly predictable policy is behind us, financial markets can now move on to other, possibly more interesting narratives,” he said.
All 64 economists in a Reuters poll taken between May 16 and 29 expected no change in rates, and some had started pencilling in rate cuts early next year.
India’s hold on rates contrasts with recent central bank actions elsewhere.
Two major central banks — the Reserve Bank of Australia and the Bank of Canada — have surprised markets this week by resuming rate hikes to combat stubbornly high inflation, pushing up bond yields across developed markets.
Despite hitting an 18-month low of 4.70% in April, analysts do not expect India’s inflation to fall to the RBI’s 4% medium-term target for at least another two years.
India’s benchmark 10-year bond yield rose above the 7% mark, against 6.99% before the decision as the central bank signalled it remained focused on bringing inflation down further.
In the last policy announcement in April, the MPC had hit a pause button on the repo rate hikes. In his speech, while retaining the key interest rate at 6.5 per cent, Das said that it was a “pause, not a pivot”. The pause came after six successive rate hikes.