Why RBI maintained status-quo for fourth time in a row and retained growth forecast at 6.5%

Reserve Bank of India (RBI) on Friday, October 6 decided to keep repo rate unchanged at 6.5 per cent for fourth straight time to bring down the inflation which has been staying above its tolerance band for quite some time.

The RBI kept its key lending rate steady as widely expected but signalled it would keep rates high and liquidity tight to bring inflation closer to its 4 per cent target.

The monetary policy committee (MPC) kept the repo rate unchanged at 6.50 per cent, in a unanimous decision. Most economists polled by Reuters had expected it to keep rates steady.

Why RBI raised rates

It has raised rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.

"Monetary policy needs to remain actively disinflationary at the current juncture," RBI Governor Shaktikanta Das told a press conference.

The RBI also maintained its policy stance of "withdrawal of accommodation" to ensure inflation progressively aligns with the committee's target while remaining supportive of economic growth.

RBI retained its real GDP projection at 6.50 per cent for current financial year with second quarter at 6.5 per cent, third quarter at 6.0 per cent and fourth quarter at 5.7 per cent. All estimates are same as provided in the last policy.

“Domestic macro conditions are expected to benefit from the sustained buoyancy in services, revival in rural and urban demand (due to upcoming festive season), consumer and business optimism, the government’s thrust on capex, and healthy balance sheets of banks and corporates. However, headwinds from global factors like geopolitical tensions, volatile financial markets and energy prices, and climate shocks pose risks to the domestic growth outlook,” State Bank of India said in a report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser.

Going ahead, increased demand for currency in circulation amid the festive season will counterbalance the increase in liquidity release owing to discontinuation of I-CRR. However, the continuous increase in UPI transactions (small ticket) could act as counterbalancing factor to such a trend. It may be noted that last year currency in circulation declined during the Diwali week for the first time in 20 years. Meanwhile, RBI has highlighted that they may conduct open market operations sales to ensure financial stability while providing liquidity to meet the productive requirements of the economy, SBI report noted.

“As the demand for liquidity has turned more on-tap given a 24/7 payment system while supply of liquidity is a constellation of several autonomous factors including the government surplus cash balance and foreign flows (inclusion in JP Morgan Index) RBI has to delicately manage the liquidity. We believe that the RBI’s preference of OMO sales as a preferred option, is to attenuate the build up of any transient liquidity build up in the system given the surfeit of Government cash balances coming back with the Government spending likely to accelerate. The bond market needs to understand this fine dichotomy of transient liquidity and permanent liquidity and hence temper its exuberance,” SBI report added.