RBI Monetary Policy 2024: MPC maintains status quo, continues with ‘withdrawal of accommodation’ stance in its first policy action of FY25

RBI MPC April Policy Meet: The monetary policy committee (MPC) of the country’s apex bank, the RBI, in its first monetary policy meeting of FY25, retained the key policy rate at 6.5 per cent by a majority of 5:1 vote. This is the seventh consecutive time the RBI has left policy rates unchanged.

Further, the central bank continued with its stance of 'withdrawal of accommodation'. This policy stance means that the country’s financial system will resort to reducing the money supply, which will rein in inflation further.

The MPC has decided to be resolute in its commitment to align CPI with its target, said RBI’s Das, while providing a rationale for continuing with the policy stance. 

Consequently, the SDF, or standing deposit facility, remains at 6.25 per cent, and the MSF and bank rate remain at 6.75 per cent.

Detailing the rationale for the policy decision, Das noted that since the last policy, the growth-inflation dynamics have played out favourably. Growth has continued to sustain its momentum, surpassing all projections. Headline inflation has eased to 5.1 per cent during January and February 2024 from 5.7 per cent in December 2023, with core inflation declining steadily over the past nine months to its lowest level in the series.

Further, Das added that they have policy space to focus on inflation while projecting CPI inflation for FY25 at 4.5 per cent. For Q1, Q2, Q3, and Q4 of FY25, the CPI inflation estimates are 4.9 per cent, 3.8 per cent, 4.6 per cent and 4.5 per cent, respectively.

“Earlier, the elephant in the room was inflation and now the elephant has gone out for a walk,” added Das.

On the growth outlook, the RBI pegs GDP growth for the new fiscal year at 7 per cent. The risks to GDP projections are evenly balanced, Das added.

"As per our survey, consumer confidence one year ahead reached a new high. The prospects of investment activity remain bright owing to the upturn in the private capex cycle becoming steadily broad-based; persisting and robust government capital expenditure; healthy balance sheets of banks and corporates; rising capacity utilisation; and strengthening business optimism as reflected in our surveys. Improving global growth and trade prospects, coupled with our rising integration in global supply chains, are expected to propel external demand for goods and services," read the governor's statement.

"Taking all these factors into consideration, real GDP growth for 2024–25 is projected at 7.0 per cent with Q1 at 7.1 per cent; Q2 at 6.9 per cent; Q3 at 7.0 per cent; and Q4 also at 7.0 per cent," added the statement.

Before the policy action announcement, RBI Governor Das said the journey of the RBI is closely related to the evolution of the Indian economy.

After the policy decision, Anitha Rangan, an economist at Equirus, said, "As expected, the RBI has maintained its pause on policy rates and kept intact its withdrawal of accommodation. Alongside the growth and inflation estimates for FY25, they have also been maintained at 7.0% and 4.5%, respectively.

However, the key headline risk is coming from rising geopolitics, which is also being evidenced in rising crude prices. The impact on inflation from the above two factors warrants a watch and staying cautious on the policy.

On liquidity, the RBI is likely to continue with the current tools of VRR and VRRR to manage deficits and surpluses in the system. Ahead of the bond inclusion, the RBI is not doing anything different to change the dynamics of policy actions or liquidity management. In summary, the RBI is not lowering the guard while inflation aligns with the target, the economist added.