RBI Keeps Repo Rate Unchanged at 6.5% for 8th Consecutive Time This is the first RBI policy after the Lok Sabha election results of 2024

On Friday, the Reserve Bank of India announced the decision to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent. The last change in the key rate was in February 2023 when the apex body hiked the repo rate by 25 basis points to 6.50 per cent from 6.25 per cent. The rate is the rate at which banks deposit money with RBI.

This is the first RBI policy after the Lok Sabha election results of 2024.

The decision was made unanimously by the Monetary Policy Committee (MPC), comprising RBI Governor Shaktikanta Das, Rajiv Ranjan, Ashima Goyal, Shashanka Bhide, Jayanth Varma, and Michael Patra. The committee held meetings from June 5 to 7, 2024. The decision to keep the rate unchanged had a 4:2 majority.

Notably, the standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent.

RBI Governor Shaktikanta Das stated that the MPC continued to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

"Going forward, high frequency indicators of domestic activity are showing resilience in 2024-25. The south-west monsoon is expected to be above normal, which augurs well for agriculture and rural demand. Coupled with sustained momentum in manufacturing and services activity, this should enable a revival in private consumption. Investment activity is likely to remain on track, with high capacity utilisation, healthy balance sheets of banks and corporates, government's continued thrust on infrastructure spending, and optimism in business sentiments. Improving world trade prospects could support external demand. Headwinds from geopolitical tensions, volatility in international commodity prices, and geoeconomic fragmentation, however, pose risks to the outlook," the RBI statement read.

Das's projection for GDP for FY 25 was revised to 7.2 per cent, up from 7 per cent that the bank had expected earlier.

Reactions from the banking industry

The RBI's prediction of 7.2 per cent stands lower than that of Bank of Baroda's 7.3-7.4 per cent for FY25. "Our view is that October can be the time when a rate cut can be considered but will be fully data driven. A clarification made by the Governor on decisions being based on local conditions is significant because often markets tend to react to Fed statements as they are interpreted as having impact on the RBI decision on repo rate," said Madan Sabnavis, Chief Economist, Bank of Baroda.

However, Indranil Pan, Chief Economist, YES BANK feels otherwise of the October change, "Even as one more member has now turned in favour of a stance change and a rate change, we do not see the RBI in any hurry to move towards a pivot. The governor points out to the fact that there continues to be risks from food inflation and the summer price changes are visible on the backdrop of a shallow winter price drop. In this context, the RBI would watch out for the pulses and vegetables prices that have seen a recent uptick in prices. There are come cautionary statements for the core inflation too."

"Continuing geopolitical conflicts, supply disruptions and commodity price volatility could make the last mile of disinflation protracted and arduous. Although headline inflation has moderated, RBI is targeting a descent of inflation to the 4 per cent target on a durable basis, which could take some time. Consequently, a rate cut seems unlikely in the near term," echoes Dhiraj Relli, MD & CEO, HDFC Securities.

"While we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," the Governor stated.

"MPC has delivered a 'Fairly Neutral Policy' with a positive undertone. The MPC has been upbeat on growth and nudged the GDP forecasts higher, while yet being cognizant and cautious of achieving the last mile of disinflation. The bump up in growth numbers renders the key optimism in policy and provides the requisite comfort to Equity markets. Given the backdrop of supportive fiscal position and the global bond index inclusion, we reckon monetary policy continues to be complementary and supportive to the bond markets. While MPC refrains from giving cues on further rate actions, 4:2 voting pattern is indeed encouraging and indicative of a possible change in stance in the near future," adds Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance Company Ltd.

Anitha Rangan, Economist, Equirus calls the unchanged rate an expected one, "RBI in its 2nd monetary policy for FY25, maintained policy rate at 6.5% as expected and maintaining withdrawal of accommodation. The key takeaway is a) shift in voting pattern from 5-1 to 4-2 (Dr. Ashima Goyal and Prof. Jayant Varma) are likely the dissenters b) Upwards revision in growth for FY25 to 7.2% from 7.0% while keeping inflation unchanged at 4.5% for the year. Overall, the key reason for maintaining policy rate is the uncertainty on the outlook of domestic inflation led by the food side."

"The GDP forecast for 2024-25 has been revised upwards to 7.2% from the previous 7%. This optimistic outlook is fueled by the strong performance of the eight core industries, consistent strength in both the manufacturing and services PMIs, and robust expansion in overall economic activity," said Raghvendra Nath, MD, Ladderup Wealth Management.

"We are encouraged by RBI's outlook on growth in FY25, which has been revised upwards from 7 per cent to 7.2 per cent. The forecast for inflation for FY25 has been maintained at 4.5 per cent. This is positive and reflects RBI's stellar actions in proactively addressing risks, thus keeping the economy on a strong momentum," said Dr Anish Shah, President, FICCI.

The next meeting of the MPC is slated for August 6 to 8, 2024.