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News Excerpt:

The Monetary Policy Committee (MPC) of RBI met from June 5 to 7, and held steady the repo rate at 6.5% for the eighth consecutive meeting.

More detail about news

• The MPC also left the monetary policy stance unchanged at ‘withdrawal of accommodation’.
• Interestingly, the RBI has hiked FY25 Gross Domestic Product (GDP) growth projection to 7.2 per cent as against 7 per cent earlier, but left retail inflation forecast unchanged at 4.5 per cent. However, analysts were expecting the GDP growth to be at 6.9–7 percent for 2024–25.
• This indicates that interest rates in the financial system are expected to remain stable as sticky food inflation keeps retail inflation high.

Why did the RBI keep the rates unchanged?

• The MPC kept the repo rate unchanged in a 4:2 majority decision as inflation remains above the 4 per cent target.
• India’s retail inflation rate was 4.83 per cent in April 2024, down from 4.85 per cent in March 2024.
• Daily retail food prices indicate rise in food inflation pressures in the month of May 2024. However, Inflation is easing but the final journey of disinflation might be tough.

Cautious Approach of MPC

• MPC members appeared to be cautious on sticky food inflation owing to supply side disruptions due to the ongoing hot weather conditions in many parts of India.
• MPC is likely to see progress of the monsoons and sowing of the summer (Kharif) crop to assess the food inflation trajectory in the second half of calendar year 2024, before pivoting towards monetary policy easing.

Impact on lending rates:

• With the RBI leaving the repo rate steady at 6.5 per cent, all External Benchmark Lending Rates (EBLR) that are linked to the repo rate will not rise, providing a relief to borrowers as their Equated Monthly Instalments (EMIs) on home and personal loans will not increase.
• However, lenders may raise interest rates on loans that are linked to the Marginal Cost of Fund-based Lending Rate (MCLR), where the full transmission of a 250-bps hike in the repo rate between May 2022 and February 2023 has not happened.

Rational behind GDP growth forecast

• The MPC decision to hike GDP growth forecast to 7.2 per cent on the back of improving rural and urban demand conditions buoyed by monsoon forecast.
• The central bank upgraded its quarterly forecast for growth as well, with Q1, Q2, Q3 and Q4 now expected to grow at 7.3 per cent, 7.2 per cent, 7.3 per cent and 7.2 per cent respectively.
• During 2024-25, so far, the domestic economic activity has maintained resilience.
• Manufacturing activity continues to gain ground on the back of strengthening domestic demand.
• The 8 core industries posted healthy growth in April 2024.
• Purchasing Managers Index, that is PMI in manufacturing, continued to exhibit strength in May 2024 and it is indeed the highest globally.
• Services sector maintained buoyancy as evident from available high frequency indicators. PMI services stood strong at 60.2 in May 2024 indicating continued and robust expansion in activity.

Why no change in monetary policy stance?

• On an average, liquidity remained in deficit in May 2024 at Rs 1.42 lakh crore, compared with a surplus of Rs 20,240 crore in April. A part of the reason for pressure on liquidity is limited government spending during the general elections.
• The RBI is expected to maintain tight liquidity in the coming months as well, to maintain pressure on short-term yields, which may in turn support the rupee.
• The status quo on stance signals that RBI is not in a hurry to cut interest rates anytime soon given the uncertainty on food inflation and Fed policy outlook.