RBI keeps REPO rate unchanged for the fifth time; here's how it will impact the economy

In line with the Street expectation and as the cumulative policy repo rate hike is still working its way, the Reserve Bank of India (RBI) in its fifth Monetary Policy Meeting (MPC) kept the repo rate unchanged at 6.5 per cent. This is for the fifth time in a row that the apex bank has kept the status quo intact. However, keeping the rate unchanged is not the key takeaway from the MPC meeting, that kicked off on December 6. NR Bhanumurthy, Vice-Chancellor, B R Ambedkar School of Economics University, Bengaluru said that financial markets were not anticipating any changes in the interest rate.

“I think more than interest rate, the markets were looking at RBI’s assessment on GDP growth and inflation going forward as the status quo on rate was already predicted by the market,” Bhanumurthy told Republic Business.

According to him, the biggest takeaway from today’s MPC meeting is significant upward revision of GDP from 6.5 per cent to 7 per cent in FY24. According to Bhanumurthy, despite global turbulence, 7 per cent of projected GDP growth, which is closer to last year's growth rate at 7.3 per cent is a positive news for India.

“The repo rate was kept unchanged as they needed to be at par with other central banks, if they are not at par this could lead to a capital flight from India. Secondly, core inflation was coming down, thus there was no urgency for RBI to go for a rate cut,” Arun Kumar, well-known economist, told Republic Business.

In the July-Sep quarter of FY24, India posted GDP growth of 7.6 per cent, much higher than projected growth of 6.8 per cent. Better than expected GDP growth in Q2 led to the revision in GDP forecast for the year by major credit rating agencies. And the RBI just followed the line and revised the GDP growth projection for the year. The apex bank has sharply rose the interest rate by 250 bps between May 2022 to December 2022.

Inflation: a real culprit

Madan Sabnavis, Chief Economist at Bank of Baroda speaking exclusively to Republic Business said that the pause on rate cuts will continue till the March end 2024. However, Vivek Kumar, Economist, QuantEco believes that monetary easing in the short term does not exist and the message from RBI MPC stays pretty much intact. “Room for monetary easing in the short term does not exist as RBI’s projected CPI inflation is seen to stay above 5 per cent level for next three quarters. There is unlikely to be any rate action until August 2024,” Kumar told Republic Business. However, he expects the easing of monetary policy from October 2024 onwards as policymakers will start having enough visibility on the durability of attainment of 4 per cent inflation.

On the inflation front, the apex bank has maintained the CPI inflation forecast at 5.4 per cent for FY24. “The MPC at a same time has also sounded a caution on the upside risks to food inflation due to supply shock in near term and reiterated its target CPI inflation of 4 per cent,” Suman Chowdhury, Chief Economist and Head-Research, Acuite Ratings and Research said.

"The RBI will not wait for the house to catch fire and then to act," quipped RBI Governor Shaktikanta Das in the post monetary policy press conference. Das underlined that the apex bank will not draw solace from declining core inflation numbers, seen as a result of rate hikes in the past. Das made it clear that RBI can’t afford to keep eyes off the inflation as India still has a long way to reach the 4 per cent inflation target. He added further that in May we prioritised inflation over growth and the same approach continues. “Inflation is our top priority now, we still have a distance to cover to reach 4 per cent,” he said.

“Months of data sets on inflation should not instill a sense of complacency,” Das said. He urged everyone "not to jump to conclusions" as far as inflation is concerned. The RBI Governor clarified that the future looks fickle and moving forward inflation control cannot be on auto pilot.

Core inflation is declining but worries pertaining to food inflation still stay intact. With 6 per cent rain deficiency in India and uneven rainfall seen as an impact of El Nino may lead to some concern on food grain production going forward.

“Food inflation is a cause of concern on account of wheat, pulses, input prices like fertilizers ) in the near term but the central bank has said that it would look through transient idiosyncratic food prices shocks,” Kumar from QuantEco said.

Commenting on the exuberance in the markets, Sabnavis told Republic Business that markets are doing well because of optimism coming from the growth. “It’s not only in India, in fact markets in other major economies are doing well, generally this happens because people expected a hard landing in terms of the global economy now things appear to be so much better, barring Germany no other country has reported negative growth, that may change also” Sabnavis said.