RBI Monetary Policy: Governor Shaktikanta Das says repo rate unchanged at 6.5%, stance at ‘withdrawal of accommodation’

India's benchmark interest rates remain unchanged for now, but within the Reserve Bank of India's rate-setting panel, voices for a rate cut are growing.

While four members of the monetary policy committee (MPC) voted to keep the repo rate at 6.5% and policy stance at withdrawal of accommodation, two differed, signalling the possibility that the MPC is gradually moving towards a future rate cut.

External members Jayanth R. Varma and Ashima Goyal backed a 25 basis points rate cut and a change in policy stance to neutral. At the last MPC meeting in April, only Varma had sought a rate cut and change in stance. The MPC makes rate decisions by majority vote.

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Governor Shaktikanta Das said MPC will not be guided by the principle of "Follow the Fed", or mimicking the actions of the US central bank. Instead, its actions will determined by the domestic growth and inflation outlook. "I would like to unambiguously state that while we do keep a watch on whether clouds are building up or clearing out in the distant horizon, we play the game according to the local weather and pitch conditions," Das said.

The MPC also raised India's FY25 GDP growth forecast to 7.2% from 7% earlier, after the economy's blistering 8.2% expansion in FY24. The BSE Sensex surged over 1,720 points or 2% to hit a life-time intra-day record high of 76795.31 on Friday, before closing 2.6% or 1618.85 points higher at 76,693.36. The 10-year benchmark sovereign bond yield rose marginally to 7.03% during the policy announcement.

While economists took note of the revised growth forecast and one more MPC member seeking a rate cut, they do not expect any immediate pivot on the interest rate front.

Monsoon, budget

"In our opinion, with growth expected to remain firm, the last phase of disinflation towards the 4% target remains arduous and hence, the RBI would be willing to bide its time. We see a shallow rate cut this fiscal, probably starting in December 2024," said Kanika Pasricha, chief economic advisor, Union Bank Of India. "Going forward, we expect the start of a shallow 50bps rate cut cycle from October 2024 on projected drop in inflation in the coming quarters. However, our bias remains for rate cuts later rather than sooner, with strong growth providing space for further delay in timing," Pasricha added.

India's annual retail inflation eased slightly to 4.83% in April from 4.85% in March, but remains well above the MPC's target of 4%. Meanwhile, food inflation rose to 8.7% in April from 8.52%.

HSBC, meanwhile, expects a 25 basis points rate cut by August on the back of a normal monsoon and a fiscally restrained budget. "But risks are for it to be pushed to later (October). We expect a shallow easing cycle of a total of 50 bps in rate cuts, taking the repo rate to 6% by March 2025," HSBC said in a note.

India is predicted to receive above-normal monsoon in 2025, after a year of scanty rains against the backdrop of the El Nino phenomenon. The four-month monsoon reached the mainland a couple of days ahead of schedule, and is expected to gradually cover the country over June and July.

The MPC, meanwhile, kept its inflation forecast for FY25 at 4.5%, adding the fall in inflation to 3.8% in the September quarter will be led by base effects, which will reverse in the next quarter.

RBI last raised the repo rate to 6.5% in February 2023, and has left it unchanged since then.

Also Read | RBI monetary policy: Inflation to growth outlook - 5 key highlights from RBI MPC outcome

Election surprise

Das said India's inflation-growth balance has become favourable since the last meeting in April, where he had compared the waning of inflation to an elephant slowly returning to the forest. The elephant has been moving very slowly, Das told reporters Friday. While inflation continues to moderate, food inflation warrants close monitoring, he said.

"While the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation. Hence, monetary policy must continue to remain disinflationary and be resolute in its commitment to aligning inflation to the target of 4% on a durable basis," Das said while announcing the policy.

The MPC began its three-day bi-monthly meeting on 5 June, a day after the results of the 2024 Lok Election were announced. The committee's decision comes just days after an election surprise, with the ruling party Bharatiya Janata Party (BJP) forced to form a coalition government after failing to secure a majority on its own.