RBI MPC meeting: The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday decided to keep the key repo rate unchanged at 6.5% by a 4:2 majority. The decision to keep the repo rate at status quo comes at a time when the Consumer Price Index (CPI) inflation is still above RBI’s comfort band of 2-6%. On the other hand, with the Q2 FY25 GDP data coming in at a disappointing 5.4%, all eyes are on the central bank to support growth.
While most economists and market experts did not expect the RBI to cut the repo rate, a Cash Reserve Ratio (CRR) cut had been anticipated. The RBI announced a 50 basis points reduction in the CRR from 4.5% to 4% in two tranches. RBI also revised downwards its GDP growth forecast for FY25 from 7.2% to 6.6% and revised upwards its CPI inflation estimates from 4.5% to 4.8%.
Why Did RBI Keep Repo Rate Unchanged?
What was RBI’s policy rationale for keeping the repo rate unchanged? What are the key takeaways from RBI governor Shaktikanta Das’s statement post the MPC meet? We take a look:
According to Das, “The Reserve Bank’s anti-inflationary monetary policy stance has been a crucial factor in bringing about a significant disinflation.”
- Economy continues its journey on a sustained and balanced path towards progress. Amidst the reshaping of the global economy, India is well-positioned to benefit from the emerging trends as it forges ahead on a transformative journey.
- The MPC took note of the recent slowdown in the growth momentum, which translates into a downward revision in the growth forecast for the current year. Going forward into the second half of this year and the next year, the MPC assessed the growth outlook to be resilient, but warranting close monitoring.
- High inflation reduces the disposable income in the hands of consumers and dents private consumption, which negatively impacts the real Gross Domestic Product (GDP) growth. The increasing incidence of adverse weather events, heightened geopolitical uncertainties and financial market volatility pose upside risks to inflation.
- The near-term inflation and growth outcomes in India have turned somewhat adverse since the October policy. The medium-term prognosis on inflation suggests further alignment with the target, while growth is expected to pick up its momentum.
- Price stability is essential for sustained growth. On the other hand, a growth slowdown – if it lingers beyond a point – may need policy support.
“Going forward, as food price shocks wane, headline inflation is likely to ease and realign with the target as per our projections. At present, it is necessary to draw on the flexibility provided by the neutral stance to wait for and monitor the incoming data for confirmation of the decline in inflation,” he said.
The RBI governor stressed that the gains achieved so far in the broad direction of disinflation, notwithstanding the recent upticks, need to be preserved.
“At the same time, the growth trajectory and the evolving outlook also need to be monitored closely. At this critical juncture, prudence and practicality demand that we remain careful and sensitive to the dynamically evolving situation with all its complexities and ramifications. A status quo in monetary policy in this meeting of the MPC has thus become appropriate and essential,” he added.