Steady repo rate at 6.5% aligns with market expectations: NSE Macro review

The Reserve Bank of India's (RBI) Monetary Policy Committee's (MPC) decision to keep the policy repo rate steady at 6.5 per cent aligns with market expectations, continuing the trend that has been observed over the past several meetings.

NSE Macro Review stated, "The RBI expectedly kept the policy repo rate unchanged at 6.5 pc, retaining the "withdrawal of accommodation" stance with a 4:2 majority."

The Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate also remain unchanged at 6.25 per cent and 6.75 per cent, respectively.

This consistent stance underscores the committee's commitment to managing inflation while supporting sustainable growth.

For the first time in eight policy meetings, the committee witnessed two dissenting votes. Professors Jayant Varma and Ashima Goyal voted for a 25 bps cut and a shift to a 'neutral' stance, reflecting growing divergence within the committee on the future path of monetary policy.

Despite these differences, the majority's decision reflects a cautious approach to inflation management amidst ongoing economic uncertainties.

The RBI has retained its inflation forecast for FY25 at 4.5 per cent, maintaining a cautious outlook despite a steady downward trend in headline inflation since February 2024.

Core inflation, excluding volatile components like food and fuel, has fallen to its lowest in recent years.

However, food inflation remains a persistent concern due to rising prices in essential items such as pulses, vegetables, cereals, and spices.

The outlook for inflation is clouded by several risks, including supply chain disruptions, fluctuating crude oil prices, and adverse weather conditions impacting agricultural productivity.

The MPC has expressed the need to remain vigilant on inflation, particularly food inflation, which is susceptible to unpredictable weather patterns and global commodity price volatility.

The projected quarterly inflation rates for FY25 also remain unchanged from the previous policy meeting, indicating a steady path toward achieving a medium-term target of 4 per cent.

In a positive development, the RBI has revised its GDP growth forecast for FY25 upwards by 20 bps to 7.2 per cent. This upgrade reflects robust economic momentum supported by a revival in rural demand, resilient urban consumption, and sustained investment activity.

Key factors contributing to this optimistic outlook include an expected normal monsoon, strong manufacturing and services activity, and increased government capital expenditure.

Quarterly GDP growth forecasts have also been adjusted upwards, with projections for Q1 and Q4 now at 7.3 per cent and 7.2 per cent, respectively, and for Q2 and Q3 at 7.2 per cent and 7.3 per cent.

However, the outlook is not without risks. Geopolitical tensions, volatility in international commodity prices, and potential economic disruptions pose significant threats to sustained growth.

Liquidity conditions have been dynamic over the past months, reflecting fluctuations in system liquidity.

The average surplus in early April gave way to a deficit by the end of May, driven by factors such as tax outflows, government borrowing, and increased currency in circulation.

The RBI has adeptly managed these conditions through variable rate repo (VRR) and reverse repo (VRRR) operations, ensuring liquidity remains aligned with policy objectives.

The Weighted Average Call Money Rate (WACR) remained well-anchored within the prescribed corridor, averaging 6.57 per cent during the April-June period.

Among the key regulatory measures, the RBI has revised the definition of bulk deposits and simplified guidelines on cross-border trade transactions.

Additionally, initiatives in the digital payments space, such as the proposed Digital Payments Intelligence Platform, aim to enhance security and inclusivity in financial transactions.

The RBI's decision to maintain the status quo on rates is indicative of a cautious approach in a complex economic environment.

With inflation risks still looming, particularly in the food sector, and global economic uncertainties persisting, the focus remains on ensuring price stability and supporting growth.

The divergence in views among MPC members highlights the potential for varied future policy actions, reflecting the dynamic nature of India's economic landscape.