As anticipated, the Reserve Bank of India opted to maintain both policy rates and the policy stance without changes on Thursday, even in the face of recent increases in food inflation and a July rate hike by the US Federal Reserve.
Under the leadership of Shaktikanta Das, the monetary policy committee (MPC) reached a unanimous decision to leave the repo rate untouched at 6.50 percent for the third consecutive meeting. Additionally, the MPC chose to keep the policy stance unaltered, defined as ‘Withdrawal Of Accommodation’.
“The monetary policy committee unanimously opted to maintain the repo rate at 6.50 percent. Consequently, the standing deposit facility (SDF) rate remains steady at 6.25 percent, while the marginal standing facility (MSF) rate and the Bank Rate remain at 6.75 percent,” stated Das.
GDP growth predictions:
Emphasizing the point, the Governor of the Reserve Bank of India highlighted that India’s economy now ranks as the fifth largest globally, and the country’s impact on worldwide economic expansion stands at 15 percent.
The RBI’s projections indicate a real GDP growth of 6.5 percent for the fiscal year 2024-24, broken down into 8 percent for Q1, 6.5 percent for Q2, 6.0 percent for Q3, and 5.7 percent for Q4. Looking ahead to the first quarter of the fiscal year 2024-25, the projected real GDP growth is set at 6.6 percent.
The problem of inflation:
Das mentioned that although inflation has decreased, the task is not yet complete. He emphasized that the RBI remains dedicated to achieving a sustained inflation rate of 4 percent. He noted that despite global economic challenges, India has effectively managed to keep inflation in check.
“The Monetary Policy Committee continues to stand firm in its commitment to aligning inflation with the 4 percent target and establishing stable inflation expectations,” Das expressed.
“Considering a normal monsoon, the most recent Consumer Price Index (CPI) inflation projections for FY24 have been adjusted to 5.4 percent, comprising 6.2 percent for Q2, 5.7 percent for Q3, and 5.2 percent for Q4. The projected CPI inflation for the first quarter of FY25 stands at 5.2 percent,” Das further elaborated.
The headline inflation projection for the second quarter of the fiscal year 2024-24 has been significantly revised upward, primarily due to the impact of increased vegetable prices.”The frequent occurrences of repeated food price shocks present a potential threat to the stabilization of inflation expectations, a process that has been ongoing since September 2022,” Das cautioned.
Steps to absorb extra liquidity by Reserve Bank of India:
Governor Das highlighted the presence of surplus liquidity within the system, which has arisen due to factors such as the reintroduction of ₹2000 banknotes into the banking system, the transfer of RBI’s surplus to the government, an upswing in government expenditure, and inflows of capital.
He emphasized that an excessive abundance of liquidity has the potential to introduce risks to both price stability and overall financial stability.
“It has been resolved that starting from the fortnight commencing on August 12, 2024, scheduled banks will be required to maintain an incremental cash reserve ratio (I-CRR) of 10 percent on the incremental growth of their net demand and time liabilities (NDTL) between May 19, 2024, and July 28, 2024. This step is aimed at absorbing the surplus liquidity that has been generated due to a range of factors,” Das articulated.
