The Reserve Bank of India (RBI) announced its second bi-monthly monetary policy for the financial year 2024-25 on Friday, June 7. This marked its first policy declaration which is followed after the declaration of the Lok Sabha election results for the year 2024. RBI Governor Shaktikanta Das, leading the six-member Monetary Policy Committee (MPC), amidst the announcement confirmed that the benchmark repo rate will remain unchanged at 6.5% for the eighth consecutive time, a decision reached by a 4:2 majority vote. The committee also maintained its stand on the “withdrawal of accommodation.”
Economic Projections and Policy Stance
Governor Das emphasized that the RBI was committed towards fostering economic growth while keeping inflation in check. The central bank has revised its GDP growth forecast for FY25 from 7.0% to 7.2%, reflecting a positive economic outlook. However, the inflation forecast for FY25 remains steady at 4.5%, highlighting ongoing concerns about price stability.
Context and Comparison
The RBI’s policy announcement came just a day after the European Central Bank (ECB) implemented its first interest rate cut since 2019, reducing the key deposit rate by 25 basis points to 3.75%. Despite this global context, the RBI has chosen to keep its rates steady, given the current economic conditions in India.
Inflation and Market Reactions
India’s retail inflation, measured by the Consumer Price Index (CPI), slightly eased to 4.83% in April from 4.85% in March, driven by declining crude oil prices. However, persistent food inflation at 8.7% continues to be a concern. Analysts predict that the RBI will maintain its cautious stance until inflation falls closer to the target range of 4% ± 2%.
Vinod Nair, Head of Research at Geojit Financial Services, noted that the RBI’s policy is likely to be a “non-event” for the markets, with more significant reactions expected from future policies influenced by new governmental coalitions, monsoon impacts, and foreign direct investment (FDI) policies.
Also read: RBI Maintains Key Repo Rate at 6.5% for Eighth Consecutive Time
Banking Sector and Monetary Tools
Governor Das highlighted the resilience of India’s banking system, bolstered by improved asset quality and profitability in the non-banking financial company (NBFC) sector. He reiterated the RBI’s flexibility in liquidity management, aiming to maintain stability in the financial markets through various monetary instruments.
The RBI also proposed several measures to enhance the financial ecosystem, including a scheme for trading sovereign green bonds and a mobile app for the Retail Direct Scheme. Additionally, steps were outlined to improve the ease of doing business by revising foreign exchange regulations.
Expert Insights and Market Sentiments
Experts like Swati Saxena, CEO of 4 Thoughts Finance, maintain an optimistic outlook on the market, driven by robust economic indicators and favorable corporate earnings. The expectation of continued liquidity and institutional investments is seen as a positive sign for sustained market resilience. Atul Monga, CEO of BASIC Home Loan, suggested that any rate cuts might occur later in the year, potentially around October, depending on the inflation trajectory and economic growth. Several other business owners and real estate experts stated that while the continuation of the status quo regarding the repo rates by the RBI benefits buyers in some aspects, it also bears some drawbacks. One expert asserted that the RBI’s strategy to wait and watch before initiating further rate cuts is well-appreciated, especially in the light of the eagerly awaited union budget that is expected to shed light on fiscal policy. Another one stated that the decision by the RBI reflects that the RBI is alert to inflation threats which is the key reason why it has kept the repo rate constant, despite portraying an upbeat economic growth picture. Experts agrees that this policy stance made much macroeconomic sense and the decision analyzing the structure of the RBI currently keeping repo rate at 6. 5 percent for the eighth consecutive time maybe consistent with the desire of the central bank to permanently guide the inflationary expectations.
