New Delhi: On Wednesday, after analysing the current and evolving macroeconomic environment, the RBI Monetary Policy Committee (MPC) decided to shift its monetary policy stance to ‘neutral’ and stay explicitly concentrated on achieving long-term inflation alignment with the target while supporting growth. The central bank kept the repo rate at 6.5 percent while maintaining India’s GDP growth prediction of 7.2 percent in FY25.
Notably, the MPC explained, that the measures were consistent with meeting the medium-term aim of 4% consumer price index (CPI) inflation while supporting growth.
Growth and Inflation Outlook
Despite downside risks from escalating geopolitical tensions, the global economy has been resilient and will likely sustain steady growth for the rest of the year. In India, real GDP increased by 6.7% in Q1 2024-25, driven by private consumption and investment. The agriculture sector is predicted to do well due to above-normal rainfall and high reservoir levels, while manufacturing and services activities will stay stable.
Furthermore, consumer and corporate confidence have increased. As a result, the investment outlook is underpinned by strong non-food bank credit growth, increased capacity utilisation, stable bank and business balance sheets, and the government’s sustained emphasis on infrastructure development. External demand is projected to benefit from increased global trade volumes. The expected real GDP growth rate for 2024-25 is 7.2%, with Q2 at 7.0 percent, Q3 at 7.4%, and Q4 at 7.4%, painting a promising picture for the future.
Why is repo rate unchanged?
Concerns stem from uncertainties related to increased global geopolitical concerns, financial market volatility, adverse weather events, and the recent increase in global food and metal prices. Hence, the MPC decided to stay diligent in monitoring the developing inflation outlook and held the policy repo rate steady at 6.50 percent at this meeting, reaffirming their commitment to maintaining stability in the face of potential risks.
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RBI Governor: Geared towards growth
In a statement issued, RBI Governor Skatikanta Das said, “The monetary policy action today reflects the MPC’s assessment that, at the current juncture, it would be appropriate to have greater flexibility and optionality to act in sync with the evolving conditions and the outlook. We stand unambiguously committed to ensure durable alignment of inflation with the target while supporting growth.”
Expert opinion
Meanwhile, experts greeted the decision on the steady repo rate with a nod, saying that while there were expectations for a rate cut in line with the US Fed, the RBI has taken a prudent approach by focussing on key indicators like the steady repo rate, domestic inflation and financial stability, particularly in light of the declining individual savings as a percentage of GDP, which poses a financial stability risk.
However, if these global issues prove temporary, experts predict a rate drop in the following policy cycle.
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Graphic Courtesy: RBI
