RBI Monetary Policy: Repo rate unchanged at 6.5%, stance ‘accommodative’, GDP growth at 7.2% for FY25

The Reserve Bank of India (RBI) on Thursday kept the policy repo rate unchanged at 6.5% for the ninth time in a row citing slower-than-expected pace of disinflation, while reiterating its vigil over price rise.

Governor Shaktikanta Das also made RBI’s position clear on the debate around the monetary policy committee (MPC) giving importance to food inflation. Food is currently assigned a 46% weightage in the headline consumer price index (CPI) basket.

By a four-to-two majority, the rate-setting panel held the repo rate and retained the stance at withdrawal of accommodation. The outcome of the MPC meeting was on expected lines, as inflation remains above RBI’s target of 4%.

All 15 economists and treasury heads polled by Mint expected the six-member MPC to hold the repo rate, while 12 expected RBI to keep the policy stance unchanged.

“There is a good amount of convergence between market expectations and the RBI’s policies. In other words, both market expectations and RBI policies — so far as monetary policy is concerned, are well-aligned,” said Das.

Thursday’s policy statement showed that while external member Shashanka Bhide, RBI executive director Rajiv Ranjan, deputy governor Michael Patra and Das voted to keep the policy repo rate and the stance unchanged, external members Ashima Goyal and Jayanth R. Varma voted to lower the repo rate by 25 bps and to review the stance to neutral.

Summarized policy

Das summarized the policy in some key points. The domestic economic growth is resilient; inflation is moderating but the pace of disinflation is uneven and slow; there is still distance to cover to align inflation to the 4% target; the financial sector is stable; India has enhanced its resilience against spillovers; and forex reserves have reached a high of $675 billion. 

Experts said that RBI has made it amply clear that there is more to go to reach the inflation target. “I think the RBI was a tad more hawkish than in the previous MPC, probably to firmly establish in the minds of the market that it should not expect any rate cuts soon,” said Indranil Pan, chief economist at Yes Bank.

Stubborn food inflation remains a cause of concern. Headline inflation measured on the consumer price index (CPI) increased to 5.1% in June on the back of higher-than-expected food inflation. With fuel remaining in deflation for the tenth consecutive month, core inflation — headline inflation stripped off food and fuel — moderated to a “historic low in May and June.”

“Food inflation, with a weight of around 46% in the CPI basket, contributed to more than 75% of headline inflation in May and June,” Das said, adding that vegetable prices increased sharply and contributed about 35% to inflation in June. “The high food price momentum is likely to have continued in July.”

Rhetoric unchanged

According to Barclays, Das' rhetoric remained unchanged, with an unambiguous focus on inflation and few details in terms of any forward guidance, in line with expectations. “The governor continued to note resilience in growth, amid stubborn food inflation. There was also a continued emphasis on maintaining vigilance and a disinflationary policy to bring down inflation closer to target,” the Barclays note on Thursday said.

The MPC on Thursday raised the inflation expectation for the September quarter by 60 basis points to 4.4%, December quarter by 10 bps to 4.7%, but lowered the March quarter projection by 20 bps, while retaining the full-year expectation at 4.5%. For the first quarter of the next financial year, the MPC projected inflation at 4.4%.

Das also spelt out RBI’s stance on giving weightage to food inflation. The FY24 economic survey said last month that India’s inflation targeting framework should consider excluding food inflation. As part of its inflation-targeting mechanism, the government had in March 2021 retained RBI’s flexible inflation target in the 2-6% band for the five years through March 2026.

Food inflation cannot be ignored

Under the framework that was first introduced in 2016, RBI targets headline inflation as measured by CPI. July’s MPC meeting was the 50th meeting of the rate-setting committee, Das said at the outset.

“With this high share of food in the consumption basket, food inflation pressures cannot be ignored,” said Das.

He added that the public at large understands inflation more in terms of food inflation than the other components of headline inflation. “Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably.” According to Das, high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation.

“The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so,” said Das.

Meanwhile, RBI kept the GDP growth projection for FY25 unchanged at 7.2%. Bankers said the continued pause points to the resilience of the domestic economy.

Zarin Daruwala, chief executive, India and South Asia, Standard Chartered Bank, said that the status quo on the repo rate as well as on the monetary stance, highlights the confidence in the Indian economy, amidst headwinds of slowing global growth and geopolitical uncertainty. “The full year GDP and inflation estimates have been retained at 7.2% and 4.5% with a continued vigil on food inflation,” said Daruwala.