RBI Repo Rate Unchanged at 6.5%

Following the conclusion of the monetary policy committee's (MPC) three-day meeting on April 5, the Reserve Bank of India (RBI) has decided to maintain the repo rate at 6.5%, a move aimed at tackling inflation. For the seventh consecutive instance, the MPC has chosen to keep the pivotal repo rate steady at 6.5% in its first meeting of the fiscal year 2025, adhering to a policy of "withdrawal of accommodation."

The resolution received substantial support, with 5 of the 6 members on the panel voting in favour. Previously, between May 2022 and February 2023, the repo rate—the rate at which the RBI lends to commercial banks—was increased by 250 basis points (bps).

Market Reaction

The action taken by the monetary policy was anticipated, thus leaving Dalal Street mostly unaffected by the outcome. Following the announcement, the Nifty 50 and the Sensex saw a slight decrease of 0.2%, trading at 22,474 and 74,097 points respectively. By the day’s end, the Nifty settled flat at 22,514 points, while the Sensex slightly gained, closing 21 points up at 74,248. Bond yields remained stable, and stocks sensitive to interest rate changes experienced a minor decline.

Analysing Inflation and Economic Indicators

The recent months have witnessed a slight easing in headline inflation, with the February figure standing at 5.09%. The core inflation, which excludes food and oil prices, has also shown a decrease to 3.3%, indicating a move towards the desired inflation target. However, achieving the central bank's 4% goal remains a challenge.

On a brighter note, India's economic growth trajectory is notably robust, with the last quarter of 2023 registering an impressive 8.4% growth rate, the fastest in 18 months, bolstered by manufacturing and construction sectors. Consequently, the government has revised its growth estimate for 2024 to 7.6% from 7.3%.

Outlook on Interest Rates

Following the Federal Reserve's decision to maintain its interest rates, it appears unlikely that the RBI will lower rates ahead of the US central bank. However, Governor Das seems to have a more manageable path to bringing inflation down to the 4% target than previously thought.

The important question now is whether Governor Das expects a slow reduction in inflation in its final stage. If this is the case, markets must lower their rate cut expectations. The forecast of a 4.5% inflation rate for FY25 effectively diminishes the immediate necessity for rate adjustments. Given that the aim is to achieve a 4% inflation rate, there's little justification for the RBI to lower rates until this target is in sight. Additionally, the MPC has expressed concerns over domestic and international climate shocks that could drive up food prices. The prevailing geopolitical conflicts could interrupt supply chains and lead to increases in commodity prices, particularly crude oil.

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