RBI Monetary Policy: ‘Decision to maintain policy rate reflects caution, but…’ here’s what experts say

The RBI maintained the benchmark interest rate (repo rate) at 6.5 percent during its second bi-monthly policy announcement for FY 2024–25, aligning with market expectations. A 4:2 majority decided to keep the repo rate unchanged, marking the eighth time the RBI has left rates steady, with the repo rate at 6.5 percent for the entire FY24. The RBI also reiterated its focus on the "withdrawal of accommodation" policy.

The three-day Monetary Policy Committee (MPC) meeting, chaired by RBI Governor Shaktikanta Das, began on June 5. The last rate hike occurred in February 2023. Alongside the unchanged repo rate, the MPC left the standing deposit facility (SDF) and marginal standing facility (MSF) rates at 6.25 percent and 6.75 percent, respectively.

Read here: RBI monetary policy: Inflation to growth outlook - 5 key highlights

Meanwhile, the MPC raised its real GDP growth forecast for financial year 2024–25 (FY25) to 7.2 percent from the previous 7 percent. In FY2023–24 (FY24), GDP growth reached 8.2 percent, surpassing analysts' expectations. However, the RBI maintained its FY25 inflation projection at 4.5 percent.

Let's take a look at what market experts make of this RBI policy.

The RBI's decision to maintain the repo rate has been met with cautious optimism by market experts. While the upward revision of GDP growth and stable inflation forecasts signal a positive outlook, concerns about food inflation and global economic uncertainties persist. Experts suggest a balanced approach, with a focus on vigilance and readiness to adapt to changing economic conditions. The RBI's policy stance, marked by a wait-and-watch approach, reflects its commitment to navigating these complexities to ensure sustainable economic growth and stability.

Read here: RBI keeps repo rate unchanged at 6.5%: What MPC policy means for home buyers

Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers

The RBI revised its annual GDP growth estimate upward for the current year while keeping the retail inflation forecast steady. Several indications from the governor's speech suggest that the RBI is unlikely to commence rate cuts soon. The upward revision in growth, the expectation of a non-linear disinflationary process, and a clear signal that the RBI will not mirror the Federal Reserve's anticipated monetary policy easing imply that a rate cut in 2024 is improbable.

However, with two of the six monetary policy committee members advocating for easing, and considering the RBI's expectation of continued falling inflation alongside the current high real interest rates, it appears that the RBI may not maintain the policy rates and liquidity tightening stance for an extended period. Today's policy is neutral for financial markets in the near term, but the medium-term implications are positive for both the equity and debt markets.

Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities

The RBI governor decided to buck the trend and stayed away from rate cuts like its counterparts in the ECB and Central Bank of Canada. No one really expected RBI to cut rates before the Fed but the governor made it a point that he isn’t going to follow the footsteps of the Fed and prefer to play the game according to the domestic conditions. The RBI concluded the policy without any rate cuts and emphasized that they remain committed to bringing the inflation down to the target of 4%. The bond yields and stock markets haven’t reacted much as everything the governor said and did was on expected lines.

Read here: RBI Monetary Policy: Raises FY25 real GDP growth forecast to 7.2% from 7%

Anitha Rangan, Economist, Equirus

The key takeaway is a) the shift in voting pattern from 5-1 to 4-2 (Dr. Ashima Goyal and Prof. Jayant Varma) are likely the dissenters b) the upward revision in growth for FY25 to 7.2 percent from 7.0 percent while keeping inflation unchanged at 4.5 percent for the year.

The key reason for maintaining policy rate is the uncertainty on the outlook of domestic inflation led by the food side. According to RBI while core inflation is encouraging and at the lowest level in the current series, it is the food inflation that is playing spoilt sport, requiring vigilance. In addition, the crude outlook remains uncertain. Overall, the Indian economy is at an inflection point with inflation on the right track but work is to be done. The watch is from the global side with global last mile inflation remaining arduous and geo-political risks. For RBI, the monetary policy has elbow room to focus on price stability. The growth revision only reiterates that RBI is willing to wait and watch – RBI can watch for longer.

Nikhil Gupta, Chief Economist, MOFSL Group

Overall, we continue to believe that rate cuts in India could happen only in late CY24 or early 2025, based on domestic and global economic growth (inflation doesn't seem to be a significant policy variable at this stage). Also, we continue to believe that India's real GDP growth could be 6.5 percent in FY25, lower than RBI's projection.

Read here: RBI monetary policy: MPC keeps FY25 inflation forecast unchanged at 4.5%

Ajit Kumar Kabi, Research Analyst - BFSI, LKP Securities

As expected, the RBI has kept the policy rate unchanged at 6.5 percent for the eight consecutive time with a majority vote of 4:2. The MPC has continued with the stance of withdrawal of accommodation. The food inflation remains higher, and it is likely to cool off with normal monsoons. We expect the accommodative stance post the full budget announcement on July 24. Additionally, food inflation will be key monitorable.

Madhavi Arora, Lead Economist, Emkay Global Financial Services

The RBI now sees FY25 growth at 7.2 percent on account of revival in rural areas, steady discretionary spending in urban areas, healthy bank + corp balance sheets and govt's capex focus. We continue to see FY25E GDP ease sharply to 6.5 percent, amid cyclical headwinds and mean reversion of technical factors. We maintain that the RBI will not precede the Fed in any policy reversal in CY24 and policy management will have to stay vigilant amid the fluidity of global narratives. Anchor rates like the RBI policy rate change will likely be a story from 1QCY25, assuming Fed cuts shift to next year. However, other factors like liquidity could keep RBI on tenterhooks on policy management.

In essence, the RBI's decision to maintain its policy rate reflects a cautious approach amid evolving economic dynamics, with a focus on addressing inflationary pressures and supporting growth prospects. While the immediate market impact may be neutral, the medium-term outlook appears optimistic for both equity and debt markets, driven by the upward revision in growth forecasts and continued vigilance over inflation trends.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.