On October 6, the Reserve Bank of India’s Monetary Policy Committee (MPC) made the widely expected decision to maintain the repo rate at 6.5 percent. RBI Governor Shaktikanta Das announced the unanimous vote to keep the repo rate unchanged during the MPC’s meeting.
In addition to keeping the repo rate steady, the central bank also announced the withdrawal of its incremental cash reserve ratio (ICRR), which had been introduced in August to gradually remove excess liquidity from the system.
The MPC also decided to leave the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates unchanged at 6.25 percent and 6.75 percent, respectively.
Governor Das reiterated emphatically that the MPC’s inflation target remains at 4 percent, not within the wider range of 2 to 6 percent. The primary goal is to stabilize inflation at the 4 percent target while promoting economic growth.
While acknowledging a decrease in global headline inflation and certain financial market dynamics such as rising sovereign bond yields, a stronger US dollar, and corrections in equity markets, Governor Das asserted that India is poised to become a new growth engine on the global stage.
Regarding GDP growth, the MPC maintained its forecast for 2023-24 at 6.5 percent.
The overall tone of the bi-monthly monetary policy remained focused on inflation management. Das noted that the CPI inflation forecast for 2023-24 remains unchanged at 5.4 percent.
Das pointed out that during the third quarter, food inflation pressures may not see sustained relief, although core CPI has eased by 140 basis points from its peak in January.
Consumer Price Index (CPI) inflation decreased to 6.83 percent in August, primarily due to cooling vegetable prices compared to the previous month. However, it remained above the RBI’s tolerance range of 2-6 percent. August marked the 47th consecutive month that CPI inflation exceeded the central bank’s medium-term target of 4 percent.
Most economists surveyed ahead of the policy announcement had anticipated a pause in RBI’s policy actions. The MPC had raised rates by 250 basis points since May 2022 to combat inflation but had kept them unchanged since the February review.
The RBI’s strategy to combat inflation through steady rates and tight liquidity was maintained. Inflation disproportionately affects lower-income households as it erodes their purchasing power without corresponding increases in income.
The status quo in interest rates is not expected to have an immediate impact on lending and deposit rates, according to bankers, who will await further signals before making any adjustments.
In the August review, several members of the MPC expressed caution about the potential rise in retail inflation in the near future. Governor Das had warned that headline inflation was expected to rise significantly in July-August due to surges in tomato and vegetable prices.
Member Rajiv Ranjan also cited uncertainty in the food price outlook due to the continuation of an uneven monsoon and the El Nino event, along with volatile global food prices.
