RBI Monetary Policy Highlights: MPC keeps repo rate unchanged at 6.5%; inflation for FY24 pegged at 5.4%

Based on pilot learning, public debt platform for frictionless delivery to be rolled out by RBIIH, says RBI Governor. RBI with RBIIH piloted KCC loans. Now it is operational in select districts.

The Reserve Bank on Thursday said it will come out with a framework allowing borrowers to switch to fixed interest rate from floating interest rate, a move that would provide relief to borrowers of home, auto and other loans reeling under the impact of high interest rate.

Unveiling the bi-monthly monetary policy, Reserve Bank Governor Shaktikanta Das said under the framework, to be put in place shortly, the lenders will have to clearly communicate with the borrowers about tenor and EMI.

“The supervisory reviews undertaken by the Reserve Bank and the feedback and references from members of public have revealed several instances of unreasonable elongation of tenor of floating rate loans by lenders without proper consent and communication to the borrowers,” he said.

To address the issue, it is proposed to put in place a proper conduct framework to be implemented by all Regulated entities to address the issues faced by borrowers, he said.

Radhika Rao, Executive Director and Senior Economist, DBS Bank

“The RBI MPC commentary on Thursday can be characterised as a pause with hawkish underpinnings. The evolving inflation trend is likely to be watched closely, pushing back rate cut expectations, especially in light of a notable upward revision in the 1Q FY25 inflation forecast.

Aurodeep Nandi, India Economist and Vice President at Nomura

“The RBI struck a fine balance between the two –by retaining policy interest rate and ‘withdrawal of accommodation’ stance and stating that it is ready to look through the inflation increase ‘for some time’, but also expressed the readiness to act in case inflationary pressures generalise. The key surprise for the market though was the temporary imposition of incremental CRR of 10% to absorb surplus liquidity. Hiking the CRR would have had monetary policy connotations, so the temporary increase is aimed to be a non-disruptive way of dealing with the issue of excess liquidity in the system in the backdrop of the recent demonetisation of the Rs 2000 notes.”

Sandeep Bagla, CEO, Trust Mutual Funds

It is a cautious wait and watch policy, with macros having turned negative since last announcement in June. Oil prices, food prices have all gone up. Inflation expectations have gone up as well. RBI has imposed additional cash reserve requirement on incremental bank deposits. In July CPI headline reading will go up to close to 6.50%. Next few months would be a good opportunity to add duration to the portfolio with a 12 month investment horizon. It would be difficult for risky assets to perform in face of the headwinds caused by tight monetary and financial conditions.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services:

The MPC has delivered in line with market expectations on rates, stance and tone, with retention of rates and stance and the tone turning hawkish. The significant change is the upward revision in FY24 CPI inflation projection from 5.1% to 5.4%. This means the high policy rates will remain high for long and, therefore, a rate cut can be expected only in Q1 FY25. From the market perspective, there are no positive or negative surprises in the policy.

The Reserve Bank of India (RBI) has asked banks to maintain an incremental Cash Reserve Ratio (ICRR) of 10 per cent on the increase in their deposits between May 19 and July 28 to suck out excess liquidity in the banking system.

The CRR, which is the cash parked by the banks in their specified current account maintained with RBI, however continues at 4.5 per cent of banks’ deposits..

This measure is intended o absorb the surplus liquidity, including due to return of Rs 2,000 bank notes. This is a purely temporary measure for managing the liquidity overhang, Governor Shaktikanta Das said.

Samantak Das, Chief Economist and Executive Director, Research, JLL India:

The decision to maintain the policy rate unchanged at 6.50% displays the steadfast and vigilant stance of the monetary policy committee. The focus on withdrawal of accommodation is likely to continue with stickiness in inflationary pressure due to the expectation of a sub-normal to normal monsoon.

This third pause in policy rates continues to remain as positive news for the real estate sector with the residential segment carrying forward its growth momentum through successive quarters. Residential sales during H1 2023 grew by 21% y-o-y, yet another period of high growth. It is interesting to observe that residential sales have consistently reached new peaks in each successive quarter over the past year. While home prices have also risen by 8-15% over the last twelve months, this increase is likely to be kept in balance by the countervailing forces of the unchanged policy rates.

Anuj Puri, Chairman, ANAROCK Group on RBI Monetary Policy:

As widely anticipated, the RBI has decided to keep the repo rates unchanged at 6.5%. India continues to outperform other countries in terms of consumption and with the festive season coming up, the RBI will not risk denting it.

This is nothing but good news for aspiring homebuyers. The unchanged repo rate will help maintain the momentum in housing sales - particularly in the mid and luxury segments, which did significantly well in H1 2023.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank on RBI’s revised monetary policy.

“The MPC preferred to remain on a wait and watch mode along expected lines. We believe that the seasonal uptick along with erratic weather conditions to continue to keep the hawkish bias of the MPC intact in the upcoming meetings as well. However, we expect the rates to remain unchanged through the rest of the year as they evaluate the impact of earlier monetary tightening in growth and inflation.”

RBI Policy live update: RBI ups retail inflation projection to 5.4 pc during FY’24 from earlier estimate of 5.1 pc due to vegetable price shocks, says RBI Governor

RBI retains growth projection at 6.5 pc for FY24 with risks evenly balanced, says Governor Das.

Announcing the bi-monthly monetary policy, Governor Shaktikanta Das said that MPC will remain focussed on withdrawal of accommodation.

The RBI Monetary Policy Committee has kept the key policy repo rate unchanged at 6.5%, Governor Shaktikanta Das has announced.

This is the third meeting on the trot that the MPC decided to maintain the status quo on the repo rate.

Repo rate is the interest rate at which banks borrow funds from Reserve Bank of India (RBI) to overcome short-term liquidity mismatches. The MPC last raised this rate from 6.25 per cent to 6.50 per cent at its meeting in February.

The Indian rupee was little changed on Thursday before the Reserve Bank of India’s policy decision, per Reuters report.

The rupee, similar to how it has been over the last two days, was in a narrow range. The currency was nearly unchanged from 82.8150 on Wednesday and the 10-day realized volatility is now back below 3%. It has been in a 14 paisa range so for this week.

The RBI, at 10.00 a.m. IST, is not expected take any rate action, though the decision is now seen as less of a formality in the wake of a jump in food prices.

BSE Sensex and NSE Nifty opened marginally lower ahead of RBI monetary policy announcements. While Sensex lost over 100 points to trade at 65,890, NSE Nifty lost 42 pts or 0.22% to trade at 19,590.

Morgan Stanley analysts expect the RBI will start cutting rates only from the first quarter of calendar 2024, per a Reuters report.

“The policy will likely note an increase in headline inflation pressures even though core inflation remains steady,” economists Upasana Chachra and Bani Gambhir of Morgan Stanley wrote in a note.

A Reuters poll shows India’s retail inflation likely accelerated to 6.40% in July due to surging food prices, breaching the upper end of the RBI’s 2%-6% tolerance band for the first time in five months.

Sensex, Nifty are set to open little changed on Thursday, ahead of the Reserve Bank of India’s monetary policy decision, where the central bank is widely seen holding key rates steady.

India’s GIFT Nifty on the NSE International Exchange was down 0.07% at 19,597.50, as of 7:52 a.m. IST.

The RBI’s rate decision will be announced at 10:00 a.m. IST.

While the central bank is widely expected to hold benchmark rates steady, the degree of hawkishness in its commentary, given the expected rise in inflation, is key for the markets.

“The policy will likely note an increase in headline inflation pressures even though core inflation remains steady,” economists Upasana Chachra and Bani Gambhir of Morgan Stanley wrote in a note.

The Indian rupee’s direction on Thursday will be impacted by RBI’s policy decision, per a Reuters report.

The Reserve Bank of India (RBI) has possibly been selling dollars to prevent the rupee from weakening below what is regarded a highly important level, according to traders.

The RBI, at 10.00 a.m. IST, is not expected take any rate action, though the decision is now seen less of a formality in the wake of a jump in food prices.

The key change to watch for would be the RBI’s assessment on a spike in food inflation and any potential revision to the current fiscal inflation projections, IDFC First Bank said in a note.

An unexpected rate hike by the RBI will “provide a boost to the rupee, which will not last long” and push USD/INR premiums higher, the forex trader said.

After the three-day long deliberations, RBI Governor Shaktikanta Das is likely to announce the decisions of the Monetary Policy Committee (MPC) on repo rate at 10 am today. According to experts, the central bank is unlikely to revise the key policy rates.

The six-member monetary policy committee (MPC) of RBI is likely to continue with status quo on the policy repo rate to rein in retail inflation.

If the MPC holds the rate at its meeting, which will take place from August 8 to August 10, it will be the third consecutive time it would have kept the repo rate unchanged at 6.50 per cent.

Repo rate is the interest rate at which banks borrow funds from Reserve Bank of India (RBI) to overcome short-term liquidity mismatches. The MPC last raised this rate from 6.25 per cent to 6.50 per cent at its meeting in February.

To recall, retail inflation based on Consumer Price Index (CPI) slowed down to 5 month low of 6.71 per cent in July as against 7.01 per cent in June.

Still, it is higher than the upper band of targeted inflation range (2-6) per cent which triggered expectation of another hike in policy interest rate.

In an opinion piece, S Adikesavan, an expert on monetary policy, argues that interest rate hikes merely raise costs, but don’t impact prices of TOP (tomatoes, onion and potato). MPC should target liquidity and leave food, fuel management to government, he said. Click ​​here to read the complete piece​​.

The surprise move to hold repo rate should not be seen as an indicator of carrying out similar moves in the future, and ​RBI ​will “not hesitate” in taking further action on rates if needed, RBI Governor Shaktikanta Das said after announcing the bi-monthly monetary policy on June 08.

“If I have to characterise today’s monetary policy in just one line...it’s a pause, not a pivot,” Das told reporters after the announcement of the policy review.

Here are some major highlights of the Reserve Bank’s second bi-monthly monetary policy for 2023-24.

• Repo rate remains unchanged at 6.5 per cent.
• Maintains pause for second time in a row.
• Standing deposit facility rate remains at 6.25 per cent.
• Marginal standing facility rate and bank rate unchanged at 6.75 per cent.
• Inflation forecast for FY24 marginally lowered to 5.1 per cent.
• GDP growth projection retained at 6.5 per cent for FY24
• Growth for Q1 pegged at 8 per cent, Q2 at 6.5 per cent, Q3 at 6 per cent and Q4 at 5.7 per cent.
• Current account deficit (CAD) expected to have moderated further in Q4:2022-23 and remain eminently manageable in FY24.