RBI keeps repo rate unchanged in line with market expectations

"The RBI’s MPC voted by a 5:1 majority to keep key rates unchanged at 6.50 percent. The policy stance is also maintained at ‘withdrawal of accommodation,'" said RBI Governor Shaktikanta Das.

SBI Chairman Dinesh Khara said, “Tracking the market expectation of the status quo, the monetary policy statement is an affirmation of goldilocks for India with high growth and low inflation in FY25 and FY26.

“Consumers' confidence in urban households continues to improve, while Rural Demand remains upbeat. The regulatory policy as usual has continued the deepening of payment systems with new functionality in UPI.

“The review of the LCR framework with the advent of 24/7 payment systems could act as a positive enabler to address frictional liquidity mismatches. The trading of sovereign green bonds in IFSC is also a welcome move and will broaden the markets.”

Sandeep Yadav, DSP MF Head - Fixed Income, said, “The monetary policy was quite uneventful, as expected. RBI maintained the status quo in rates, as well as its tone. While the inflation and growth projections did change, the difference was not meaningful.

“In such a scenario, we believe that the Indian bonds markets will be tracking global markets for a while. Thus, the US treasury yields and oil should remain near term drivers.

“For the longer term, we expect the favourable demand supply dynamics to bring yields lower.”

Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank, noted that the central bank does not seem to be in any rush to start cutting the repo rate.

While the RBI kept the FY25 CPI forecast unchanged at 4.5%, interestingly, for the first two-quarters CPI was further lowered, potentially to a sub-4% zone. That will push the real repo rate (ie., the difference between the repo rate and inflation) beyond 2% for a while, strengthening the case for repo rate cuts later this year.

The central bank recognized India’s resilient macro backdrop leading to greater policy space for the RBI.

However, the timing of RBI rate easing will involve several other factors. Most of the major global central banks appear to be cautious to start easing policy rates. While the US Fed is expected to start easing rates in June, such expectations altered several times in recent months and are far from certain.

Against that backdrop and given that the RBI’s legroom for the repo rate from the current 6.50% is likely limited to only 50-100 basis points, one maintains that a rate cut by RBI is unlikely before August.

He added, “While the MPC decided to keep the stance of the policy unchanged today, one sees merit in considering changing the stance of monetary policy to “neutral” sooner than later. The MPC adopted “withdrawal of accommodation” as the stance of monetary policy since April 2022. Since then, policy rates were pushed higher till February 2023. For the next one year, the RBI absorbed a large quantum of excess liquidity from the banking system. However, now the RBI will likely move sideways for a few months both on the rates and liquidity front. Accordingly, one feels that the case for a change in policy stance to “neutral” in the coming MPC meetings is stronger now.”

ESAF Small Finance Bank MD and CEO, K. Paul Thomas said today’s policy decision by MPC gives reasons for bank customers to cheer about.  “One, by holding the rates steady, the equated monthly instalment (EMI) of the customers will remain unchanged for the next couple of months. On the other hand, with credit growth remains buoyant, lenders are likely to hike rates on term deposits to garner fresh funds for on lending and that is good news for depositors.”

Mandar Pitale, Head Treasury, SBM Bank (India) Limited, said, “"MPC has delivered policy verdict on expected lines with a firm commitment to focus on a 4% goal post for CPI securing using appropriate monetary policy tools. Robust growth expected in the near future will provide the policy space to remain focused on inflation. Recent volatility in Crude prices with a bias to move up and elevated food inflation will remain on the top of MPC watchlist.

“The review of LCR framework for managing liquidity risk, due to the increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels may result in more liquidity buffer to be maintained by Banks.

“Forecast CPI inflation for Q1 FY 24-25 is 4.9% and is further forecasted significantly lower to 3.9% in Q2. This may be considered as a lead indicator to estimate the first policy rate easing in October MPC preceded by the probable change of stance to “neutral” in August MPC meeting; if the inflation trajectory turns out as projected by MPC."

Deepak Ramaraju, Senior Fund Manager, Shriram AMC, "As expected, the committee decided to keep the interest rates unchanged. However, it's important to note that the timing of the rate cut is linked to the inflation rate reaching 4%. This creates some uncertainty about when the rate cut will happen.

“Currently, we are in a deflationary zone, but there are upward pressures from food prices (due to the El Nino factor) and crude oil shocks that can add to the uncertainty. The market is concerned about a potential delay in the rate cut, which could cause it to remain range-bound in the near term."

Vikrant Mehta, Head - Fixed Income, ITI Mutual Fund on RBI Monetary Policy, “The MPC meeting's decision on the policy rate and stance were on expected lines, which pushed bonds in a tight range post policy. With strong US data keeping global markets guessing on the timing of the US Fed rate cut, it appears that the RBI may want to see some further traction on the same before moderating its policy stance and then towards an eventual easing of the policy rate.”

Parijat Agrawal, Head – Fixed Income, Union Mutual Fund said, “The softening of core inflation gives sufficient room to MPC, however volatile food inflation and recent uptick in crude and other commodity prices is to be watched and MPC kept the full year's projection at 4.5%. The strong momentum in growth also gave comfort to MPC to align the CPI on a durable basis to 4%.

“We expect rate cuts in the 3rd quarter of FY 25, possibly after the US FOMC starts rate cut cycle. RBI is expected to keep liquidity neutral so that further transmission of higher rates can continue. There is a possibility of modification of the LCR framework going forward which may augur well for bonds.”

Siddarth Bhamre, Head of Institutional Research, Asit C Mehta Investment Interrmediates said, “Domestic factors influencing inflation are projecting that inflation may remain on downward trajectory. However, concerns related to volatility in food prices, geo-political tensions and disruption in supply channels remain the challenges to deal with. As far as GDP growth is concerned, projections remain at 7.0% for 2024-25.

Global factors are weighing high on governor's mind. In advanced economies inflation remains sticky because of tight labour markets. A significantly higher Debt to GDP ratio may pose a financial threat in adverse situations.

Sanjeev Agrawal, PHD Chamber of Commerce and Industry (PHDCCI) President said, “The continuously accelerating economic growth and softening inflation trajectory, coupled with the status quo in repo rate will lead to much higher GDP growth in FY2025.”

“We expect a repo rate cut as and when headline inflation softens around 4.5%,” said Agrawal.

As the third quarter of FY23-24 GDP surprised with a significantly high growth of 8.4%, the current financial year is also expected to give such surprises on the back of robust economic activity and enhanced resilience of the economy, said Agrawal.

“We believe with inflation firmly under control, RBI is keeping eye on FED and global risk parameters. Also, till the time GDP growth rate remain above 6%, RBI may not blink first to reduce interest rates.”