RBI maintains status quo, keeps repo rate unchanged

The Reserve Bank of India (RBI) has maintained the status quo and kept the repo rate unchanged at 6.5 per cent. RBI Governor Shaktikanta Das announced this while unveiling the first bi-monthly monetary policy of the financial year 2024-25 on Friday (April 5).

The central bank has kept the repo rate unchanged for the last six consecutive Monetary Policy Committee (MPC) meetings. RBI MPC started its three-day meeting on April 3. The decision was announced following the culmination of the meeting.

Announcing the decision, Das said, “The RBI is well-positioned to take appropriate steps in the best interest of the economy. I would like to focus on the decision of the monetary meeting: After a detailed assessment, RBI MPC decided by majority 5-1 - policy repo rate unchanged.”

The RBI decided to keep policy rate unchanged for the seventh time in a row though it remains vigilant towards upside risks to food inflation. The rate increase cycle was paused in April last year after six consecutive rate hikes aggregating to 250 basis points since May 2022.

Retains 7% growth forecast

Meanwhile, the RBI retained GDP growth forecast of 7 per cent for 2024-25 financial year, lower than the 7.6 per cent expansion estimated for FY24.

In its February monetary policy, the RBI had projected the GDP growth rate of 7 per cent for the financial year beginning April 1.

The RBI governor said, “India presents a different picture on account of its fiscal consolidation and faster GDP growth. Turning to domestic growth, domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and an improving global environment. The second advance estimates placed the real GDP growth at 7.6% for 2023-24, the third successive year of 7% or higher growth.”

Das said the rural demand is gathering pace, and sustained growth in manufacturing sector should boost private investment. However, there are headwinds from geopolitical tensions and disruptions in the global trade route.

Das further said the country's real GDP is expected to grow 7 per cent in 2024-25, with June quarter growth at 7 per cent, and September quarter at 6.9 per cent. In the third and fourth quarter the growth is expected to be 7 per cent each.

Foreign reserves at highest

“The Standing Deposit Facility rate remains at 6.25% and the Marginal Standing Facility rate and Bank Rate remain at 6.75%,” he added. The RBI governor said that core inflation has declined steadily owing to which MPC must be 'actively disinflationary'.

In his address, Das said, “Looking ahead, robust growth prospects provide policy space to remain focused on inflation and ensure its descent to the target of 4 percent. As uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that may derail the path to disinflation. Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of past monetary policy actions.”

On the issue of foreign exchange reserves, Das said, “Earlier, the decline in foreign exchange was partly due to a change in valuation. And we had at that time, clearly and firmly stated that we were using our FR in a judicial manner. The strong umbrella that we have built. We were mindful. As you see, now the reserves stand at the highest level.”

Inflation moving closer to target

The RBI MPC sees the inflation at 4.5 percent for FY25. The governor said, “Inflation is on a declining trajectory and GDP growth is buoyant. At this juncture we should not lower our guard but continue to work towards ensuring that inflation aligns durably to the target.”

“With rural demand catching up, consumption is expected to support growth in FY25. The RBI has projected a retail inflation of 4.5 per cent in fiscal 2024-25. It has projected an inflation of 4.9 per cent in Q1, 3.8 per cent in Q2, 4.6 per cent in Q3 and 4.5 per cent in Q4 of FY25,” he added.

He also said that liquidity situation improved in the first half of the month and RBI conducted 14 fine tuning operations in February to earlier March. Dwelling on investment scenario in the country, he said, “Prospects of investment activity remain bright because of persisting and robust government capital expenditure.”

Liquidity coverage ratio

The RBI governor also announced a review of the liquidity coverage ratio for banks to ensure smooth functioning even in events of acute stress.

In a statement on ‘Developmental and Regulatory Policies’ announced with the new fiscal year's first monetary policy review, Das said recent events in other countries have shown that digital channels have been used by customers to quickly withdraw or transfer funds from banks.

This warrants a revisiting of the assumptions made under the liquidity coverage ratio framework, Das said, adding that it is only in events of "acute stress" that such a framework would be helpful.

"Certain modifications to the LCR (liquidity coverage ratio) framework are being proposed towards facilitating better management of liquidity risk by the banks," Das said, adding that a draft circular will be issued on it soon. He assured that the RBI will adopt a balanced and consultative approach on reviewing the regulation.

At present, banks covered under LCR framework are required to maintain a stock of high quality liquid assets (HQLA) to cover the expected net cash outflows in the next 30 calendar days, he said.

Meanwhile, the governor also announced that Small Finance Banks (SFBs) will soon be allowed to deal in permissible rupee interest derivative products.

At present, this set of lenders is allowed to use only Interest Rate Futures (IRFs) for the purpose of proprietary hedging, he said. The decision to deal in rupee interest derivatives will expand the avenues to hedge interest rate risk and also provide greater flexibility to the SFBs, Das said.

(With agency inputs)