The Reserve Bank of India's (RBI) six-member Monetary Policy Committee on Friday decided to keep the policy repo rate unchanged at 6.5 per cent for the fifth consecutive review meeting and withdraw the accommodation policy. clearly communicating that the interest rate cycle had reached its peak.
One of the key highlights of this no-action policy was the sharp revision in GDP growth for FY24, which is now estimated at 7 percent, compared to 6.5 percent previously.
The FY24 inflation projection has been maintained at 5.4 percent, with a caveat for the November and December figures.
Stressing that monetary policy must remain actively disinflationary, RBI Governor Shaktikanta Das said: “Policymakers need to be aware of the risk of getting carried away by a few months of good data or by the fact that the CPI (consumer price index) ) Inflation has come within the target range. They must also be aware of the risks of overt tightening, especially when major structural changes and shifts are taking place, both geopolitically and geoeconomically.”
Das, however, said an overly strict tightening should not be interpreted as an imminent change in the RBI's approach.
While acknowledging that monetary policy had made significant progress in reducing inflation to below 5 percent in October, Das said summer 2022, when headline inflation repeatedly breached the upper tolerance limit of 6 percent, was lagging behind.
“We have now reached a stage where every action must be thought through even more carefully to ensure overall macroeconomic and financial stability; even more so because future conditions can be fickle. We must remain vigilant and ready to act, (in accordance with) the changing outlook,” he said.
Das said the future was expected to be clouded by uncertain food prices and the CPI rate for November was expected to be high. According to Das, inflation management could not be done on autopilot.
The policy was interpreted by the market as moderate compared to the previous two. In the August policy review, the central bank mandated a temporary increase in the cash reserve ratio for banks, while in the October policy, Das talked about possible open market sales of bonds to clean up liquidity.
“No new move by the RBI against the backdrop of a larger-than-expected upward revision to growth can be interpreted as any easing in the margins,” said Kaushik Das, chief economist at Indian bank Deutsche Bank.
“Also, for the first time in the current rate tightening cycle, the RBI has highlighted the potential risks of too much tightening. This does not mean that the RBI is ready to cut rates anytime soon, but it is likely to mark a small reversal in the one-sided narrative that rates should remain high for longer,” he added.
A Nomura report said that if inflation were to fall closer to 4 percent in FY25 and growth was to fall short of the RBI's robust outlook of 6.5 percent, the central bank would have to revisit the need for such high real interest rates judge.
“We maintain our view that the RBI will implement 100 bps of cumulative rate cuts from August, with risks focused on earlier cuts,” the report said.
Das said growth remained resilient and robust, which surprised everyone positively. Second-quarter GDP growth of 7.6 percent was much higher than the central bank's projection of 6.5 percent.
“The upward revision in GDP forecast to 7 per cent (SBI at 7 per cent) for FY24 looks optimistic and reasonable and is likely to be exceeded,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India, on the revision of the budget. Growth forecast for financial year 24 to 7 percent.
On the tight liquidity conditions, the RBI said this was mainly due to higher currency leakage during the festival season, government cash balances and central bank market operations.
“Driven by these autonomous factors, system liquidity has tightened significantly compared to what was expected in the October policy statement. Consequently, the need to auction the OMO sales has not arisen so far,” Das said.
The RBI said the government spending was likely to further ease liquidity conditions and said it would remain agile in liquidity management.