RBI Maintains Repo Rate at 6.5%: Key Insights from the Latest Monetary Policy Committee Meet

In its recent meeting held from August 6 to 8, the Reserve Bank of India’s Monetary Policy Committee (RBI MPC) chose to keep the repo rate stable at 6.5%, as announced by Governor Shaktikanta Das. This decision marks the ninth consecutive time the rate has been maintained, reflecting a majority decision of 4:2 among the committee members.

Unchanged Rates Across the Board

Alongside the repo rate, the standing deposit facility (SDF) rate remains at 6.25%, and both the marginal standing facility (MSF) rate and the bank rate continue at 6.75%. This consistency aligns with the RBI's strategy of ‘withdrawal of accommodation,’ aimed at stabilizing inflation around their target of 4% while fostering economic growth.

GDP and CPI Projections by the RBI

Despite maintaining an annual growth forecast at 7.2% and an inflation estimate at 4.5%, the RBI has made some adjustments. The GDP growth forecast for Q1 FY25 has been revised slightly downward from 7.3% to 7.1%, while the CPI inflation forecast has been increased from 3.8% to 4.4%. 

The central bank has pinpointed volatility in food prices as a major risk factor that might disrupt inflation expectations and influence core inflation. The recent spike in June’s CPI inflation to a four-month high of 5.08%, primarily due to an increase in food prices, highlights the potential for continued high rates until inflation aligns more consistently with the 4% target.

Governor Das Confident in India's Economic Fortitude

Governor Das remains optimistic about India’s economic resilience, highlighting strong government capex, robust corporate and banking sectors, and increasing fixed investment activities as key growth drivers. Despite global uncertainties and speculative concerns triggered by recent US employment data, Das emphasizes the importance of maintaining a focus on domestic economic indicators.

Future Policy Direction and Rate Expectations

Governor Das emphasized the RBI's focus on managing domestic inflation sustainably rather than aligning with monetary policies of developed nations, which should foster more substantial and lasting economic growth. The recent MPC meetings have consistently aimed at maintaining the 4% CPI target with a strong emphasis on controlling food inflation. Consequently, unless there is a change in approach towards food inflation, rate cuts seem improbable in the near term. Nevertheless, Das noted that food inflation is likely to decrease due to normal monsoon patterns and base effects.

In summary, during the August review, Das effectively argued for the MPC to maintain its current policy until inflation falls to the targeted 4% zone. He left no ambiguities for the stock markets concerning upcoming actions. "We need to be patient to finish the job at hand," Das remarked. Simply put, if inflation approaches the 4% target by August, it's highly likely that the MPC will adjust its policy stance to neutral and consider a rate cut by the end of this year or early next year.

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