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Economy 28-Mar, 2024

Reserve Bank of India likely to keep repo rate unchanged in upcoming Monetary Policy meetings: Report

By: Team India Tracker

Reserve Bank of India likely to keep repo rate unchanged in upcoming Monetary Policy meetings: Report

At the end of its next meeting on April 3-5, the RBI was predicted by all 56 economists who participated in the Reuters poll conducted on March 15–22 to maintain the repo rate at 6.50 percent. Image Source: IANS

In the October–December quarter of FY24, India's GDP grew at the quickest rate among major economies, 8.4 percent, above both Street and RBI predictions

According to a majority of economists who participated in a poll conducted by the news agency Reuters, the Reserve Bank of India (RBI) is likely to keep the repo rate unchanged until at least July this year, a bit longer than the US Federal Reserve is expected to do so, over robust economic growth and higher inflationary trends.

At the end of its next meeting on April 3-5, the RBI was predicted by all 56 economists who participated in the Reuters poll conducted on March 15–22 to maintain the repo rate at 6.50 percent. On the first cut's anticipated date in 2024, the economists couldn't agree. According to the median projections, the rate will be 6.25 percent by the end of September and 6 percent by the end of the current year.

In the October–December quarter of FY24, India's GDP grew at the quickest rate among major economies, 8.4 percent, above both Street and RBI predictions. Rate cuts are not implied by retail inflation, which is still hovering around the upper bound of the central bank's two percent to six percent objective.

The conflict between Russia and Ukraine served as a trigger, driving up the price of commodities generally and oil in particular. There was a notable pass-through into core inflation as a result of this being factored into the costs of other goods and services. The US Federal Reserve (in March 2022) and the European Central Bank (in July 2022) were two of the main central banks that raised rates last. In India, the repo rate was raised to 4.4 percent as part of a tightening of policy that started in May 2022.

In this phase, the RBI front-loaded its first rate rise and raised the repo rate by 40 basis points (bps), which resulted in an increase in India's policy rate divergence with the US, UK, and Europe. One tenth of a percentage point is equal to one basis point.

Following its meeting in December, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously agreed to maintain the repo rate at 6.5 percent. The MPC maintained the policy stance of 'withdrawal of accommodation' by the majority of 5 out of 6 members. The MPC has opted to keep the repo rate at its current level at its fifth meeting. In February 2023, the MPC last increased this rate by 25 basis points, to 6.50 percent. 5 out 6 MPC members voted in favour of withdrawal of accommodation, said RBI Governor Shaktikanta Das.

In an attempt to slow down the rising inflation, which fell to a four-month low of 4.87 percent in October, the RBI has increased the repo rate by a total of 250 basis points (bps) since May 2022.

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

Source: Ministry of Statistics and Programme Implementation

According to the data released by the Ministry of Statistics and Programme Implementation, India’s retail inflation almost remain unchanged in the month of February as compared to January when it was 5.1 percent. The Consumer Price Index or the retail inflation in the country was recorded at 5.09 percent in February 2024. The urban inflation dropped to 4.78 percent in February from 4.92 percent in January 2024. In February 2023, inflation was a notch higher than the upper tolerance band, at 6.44 percent. Inflation stood at 5.5 percent in November 2023, up from 4.87 percent in October and 5.02 percent in September. Talking about the rural inflation, it remained unchanged in February at 5.34 percent. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services.

Aditi Nayar, Chief Economist at ICRA, commented on the CPI statistics and stated that, with the exception of food and beverages, all other subgroups had a decrease in inflation in February 2024, suggesting that the momentum in non-food goods continued to track a welcome reduction. She said, "In an encouraging trend, the core-CPI (CPI excluding food and beverages, fuel and light and petrol and diesel for vehicles) eased to 3.5 percent in February 2024 from 3.7 percent in January 2024, which is the lowest reading for this metric based on the available data since Jan 2015.”

Aditi Gupta, an economist at Bank of Baroda wrote, "While the Fed has already indicated policy rates are likely to be reduced in the coming months, the growth and inflation dynamics in India suggests the RBI may just keep rates elevated for longer. In any case, the Fed is likely to cut interest rates much more than the RBI, which will ensure the interest rate differential settles somewhere close to the historical trend."

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