RBI keeps repo rate unchanged at 6.50%; FY24 inflation forecast raised to 5.4%

RBI MPC policy meet: The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday decided to keep the repo rate unchanged at 6.50 per cent in its second bi-monthly monetary policy meeting of the fiscal FY23–24 that concluded today. The meeting began on Tuesday, August 8.

While announcing the decision, RBI Governor Shaktikanta Das said that all the members unanimously decided to maintain the status quo on rates. The stance also remains the same: withdrawal of accommodation. The repo rate is the rate at which the central bank of the country lends money to commercial banks in case of any shortfall of funds. 

The central bank last increased the repo rate to 6.50 per cent in December last year.

As regards the Indian economy, the governor said that the economy continues to be robust and the Indian companies' balance sheets remain very strong. The governor added that a lot of steps were taken to keep inflation under control.

RBI MPC on inflation, rains, and GDP growth

The central bank governor said that inflation will increase in the second quarter of the current fiscal year (Q2 FY24), i.e., the July-September period. The increase will be due to a rise in vegetable prices. Governor Das added that the rainfall this time has been unusual throughout the country. However, green shoots are visible in rural demand.

The governor said that in Q2FY24, the retail inflation is expected to rise to 6.2 per cent from 5.2 per cent projected earlier. For the full fiscal FY24, the inflation projection has been revised upwards to 5.4 per cent from 5.1 per cent.

For FY24, the GDP growth projection remains unchanged at 6.5 per cent while the economic growth for the first quarter of the next fiscal (Q1 FY25) is seen at 6.6 per cent.  

Commenting on the decision, Madan Sabnavis, Chief Economist, Bank of Baroda, said the following:

"While the RBI has expectedly not changed the repo rate or stance this time, there has been a change in the inflation outlook quite significantly. Interestingly, the RBI has increased the forecast to 5.4 per cent from 5.1 per cent, with the second quarter inflation crossing 6 per cent (6.2 per cent). This is indicative that for the present calendar year, there is no probability of a rate cut as the inflation forecast for Q3 is placed at 5.7 per cent.

The introduction of an incremental CRR, though on a temporary basis, will impound the resources of banks and have an upward impact on market rates. While there will still be surpluses in the market, the concept of impounding of resources will exert upward pressure on sentiment and hence interest rates. We can assume that this will be reversed before the festival/busy season, as the RBI could have gone in for Open Market Operation (OMO) to permanently take out liquidity from the system."