RBI’s MPC maintains status quo, keeps repo rate unchanged

• The MPC has unanimously decided to keep the rates unchanged.
• The central bank paused its rate hike cycle in February this year.
• Economists expected MPC to stay with the ‘pause’ on interest rates, with fresh risks to inflation. GDP growth projection retained at 6.5%.
  

The Reserve Bank of India’s (RBI) rate setting panel kept the policy repo rate unchanged at 6.5% on Friday. The Monetary Policy Committee (MPC) has unanimously decided to keep the rates unchanged in the October meeting. There is no change in its stance either - it is retained at withdrawal of accommodation. The central bank also announced that it was withdrawing its incremental cash reserve ratio (ICRR), which was introduced in August to withdraw surplus liquidity from the system.

“It’s a status quo policy but there are many aspects that I will spell out which will reveal our approach to the global headwinds,” said Shaktikanta Das, governor of RBI.

This is the fifth time that the MPC has kept policy rates unchanged since February.

The MPC has remained focussed on withdrawal of accommodation. “India is poised to be the growth engine of the world. Need of the hour is to remain vigilant. High inflation is a major risk and MPC is focussed on aligning it to the 4% target,” Das added.

The RBI projects India’s GDP to grow at 6.5% in FY24. CPI inflation is projected to be at 5.4% for the financial year, which remains unchanged.

The Reserve Bank of India’s rate setting panel was expected to stay with the ‘pause’ on interest rates, as fresh risks have emerged to inflation. The central bank has paused its rate hike cycle in February this year. In August, India's retail inflation moderated to 6.8% from a high of 7.4% in July. The lower inflation print was due to a fall in the prices of vegetables after they went through the roof in July on patchy rains in some parts of the country. Just as it seemed that inflation was cooling in August, 30% higher crude oil prices and a stronger dollar will have worsened the outlook for inflation in the future. Higher crude prices have a cascading effect on goods that need to be transported.

Economists expect September’s inflation data to remain above the RBI’s upper tolerance band. CareEdge Ratings expects the RBI to miss its Q2 inflation projections by nearly 60 basis points and will consequently revise its whole-year projection to 5.6% from an earlier projection of 5.4%.

Even though the risks to inflation remain elevated, the MPC was expected to hike rates as many other central banks have done in the last few months. However, in the face of rising global bond yields, ever strengthening dollar index and higher crude oil prices, debt market experts expect RBI to continue with 'withdrawal of accommodation'”policy stance. Systemic liquidity will be tightened further in the second half. The market did not, therefore, expect RBI to take any permanent liquidity withdrawal measures.

Systemic liquidity, which had been in surplus at ₹2.1 trillion during the August MPC meeting, transitioned into a deficit of ₹1.5 trillion by 27 September. This shift has increased money market rates, with the overnight call money rate rising from 6.4% to 6.8%.

The RBI announced that it would implement an incremental cash reserve ratio (I-CRR) in its August MPC meeting, which sucked out liquidity to the tune of ₹1.1 trillion from the banking system. Despite the gradual withdrawal of the I-CRR, systemic liquidity continued to stay in the deficit since mid-September due to quarterly tax outflows. The central bank’s interventions in the foreign exchange market have marginally contributed to some absorption of rupee liquidity.

The RBI was also expected to retain the GDP forecast for the full financial year at 6.5% as headwinds have not yet settled. The central bank will wait to see data emerging after the festive season and output from the kharif season before changing forecast again.