RBI Holds Steady At 6.5% Repo Rate, Hikes Growth Forecast To 7%

The Monetary Policy Committee (MPC) headed by RBI Governor Shaktikanta Das on Friday opted to maintain the repo rate at 6.5 per cent following a comprehensive evaluation of the evolving macroeconomic developments. This is the fifth consecutive meeting in which the MPC has chosen to maintain the existing status on the repo rate. The repo rate was last increased in February 2023 by 25 basis points to 6.5 per cent. The Governor also revealed that 5 out of the 6 MPC members voted in favor of the withdrawal of accommodation.

Governor Das highlighted the broad-based moderation in retail inflation, which decreased to 4.87 per cent in October from the peak of 7.4 per cent in June. However, he expressed caution about potential food inflation pressures in the near term, particularly in November and December. Despite the positive economic trends, Das emphasized the MPC's vigilance and readiness to take appropriate actions if necessary. The RBI also revised its GDP growth projections for FY24 to 7 per cent instead of 6.5 per cent it had projected earlier. The Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) rates were left unchanged at 6.25 per cent and 6.75 per cent, respectively.

Dinesh Khara, Chairman, SBI, said that the announcement is a clear affirmation that the Indian economy is poised for a stable inflation and high growth regime with the possibility of growth breaching 7 per cent for the 3rd successive year.

“The measures regarding liquidity will facilitate better fund management by banks. The enhancement of limits under UPI for education and healthcare will ensure that UPI truly emerges as a public good. Furthermore, moving towards a unified regulatory framework for connected lending and a regulatory framework for web-aggregation of loan products will ensure better pricing, transparency, and enhanced customer centricity,” Khara added.

Karthik Srinivasan, Senior Vice President, Group Head - Financial Sector Ratings, ICRA said, “Given the 24X7 fund transfer facility available for customers, the banks face challenges on liquidity management over the weekend, when inter-bank markets are closed. Hence, as a matter of prudence they end up borrowing three-day funds in the inter-bank market and MSF window over the weekend.”

He further mentioned that similarly, banks with surplus liquidity end up locking the funds for three days under SDF over the weekend, with the proposal to reverse these three days' MSF and SDF facility, we expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to also moderate.

“However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially. This will also lead to marginal savings in interest costs for banks that end up borrowing and depositing in MSF and SDF respectively over the weekend,” Srinivasan noted.

The MPC, with a majority vote of 5:1, has affirmed its commitment to focus on withdrawing accommodation to bring inflation in line with the target while still supporting overall economic growth. Governor Das noted the resilience of emerging market economies in the face of current global volatility, contrasting it with previous episodes. Although headline inflation has declined from recent highs, it remains elevated in various economies, and core inflation persists.

RBI On Global Economy

The global economy continues to remain fragile. World trade is decelerating amidst global tide of protectionism. Despite significant restoration of global supply chains, factors like elevated debt levels, lingering geopolitical hostilities and extreme weather conditions aggravate the risks to global growth and inflation outlook. Easing of inflation in advanced economies has led to expectations of an early end to the monetary tightening cycle, shoring up market sentiments. Sovereign bond yields are softening as markets are not factoring in any further rate hikes.

Welcoming RBI’s move, Mahesh Gupta, CMD, Kent RO Systems Ltd, said that the unchanged interest rates are expected to play a crucial role in reducing borrowing costs, creating a favorable environment for increased consumer spending, particularly on significant purchases such as home appliances.

On revised GDP growth, he said, “The adjusted GDP growth expectation aligns well with the industry's aspirations. A robust economy, coupled with stable interest rates, holds the promise of elevating disposable incomes and bolstering consumer confidence. The targeted focus on rural and semi-urban areas through policy measures takes on renewed significance, potentially unlocking untapped markets and spurring demand for consumer durables in the evolving economic scenario.”

Since May 2022, the RBI has implemented a cumulative increase of 250 basis points in the repo rate to counter rising inflation. Despite inflation dropping to a four-month low of 4.87 per cent in October, it is expected to remain above the RBI's medium-term target of 4 per cent for an extended period.

With the Reserve Bank of India opting to keep the Repo Rate unchanged, outlook for the auto and automotive parts industry remains positive, said Rajeev Kapoor, MD Steelbird.

“The stability in interest rates is expected to lower borrowing costs, providing a catalyst for increased demand, particularly among new riders. The thriving motorcycle and scooter market, supported by a buoyant economy, continues to present opportunities for expanding our customer base. The RBI's decision is anticipated to fuel heightened demand, drive premiumization, and enhance brand awareness, positioning helmet manufacturers for sustained growth in the dynamic economic environment,” Kapoor added.

The move is well aligned with the intention of the Monetary Policy Committee for an ecosystem, favorable to a sustainable growth which promises to be robust braving global headwinds, ASSOCHAM said.

''While inflation has been declining for the past few months, RBI seems resolute in its target of taming it to its target of four per cent. It has so far kept a vigil eye on both global and domestic events for a stance that would bring more confidence to investors, borrowers and consumers as the focus of the credit policy remains on price and financial stability,'' ASSOCHAM Secretary General Deepak Sood said.

Additional Measures

• The RBI is in the process of enhancing the comprehensiveness of the regulatory framework governing forex risk hedging. This involves consolidating guidelines for all transaction types under a single Master Direction.
• Expressing concerns about connected lending, the RBI has highlighted moral hazard issues impacting pricing and credit management. The central bank is mulling over the idea of introducing a unified regulatory framework to address these concerns.
• The RBI has increased the transaction limit for payments to hospitals and educational institutions via UPI from INR 1 lakh to INR 5 lakh per transaction.
• Additionally, the RBI has announced that payments up to INR 1 lakh will no longer require OTP-based authentication. Currently, OTP-based authentication is triggered for auto payments via UPI exceeding INR 15,000.
• Recognizing the growing data volumes handled by banks and financial entities in India, the RBI is working on establishing a secure cloud facility. This initiative aims to enhance the security, integrity, and privacy of data in the financial sector.
• The RBI has put forth a proposal for the creation of a Fintech Repository, aimed at ensuring a robust Fintech sector and fostering best practices. This repository will capture vital information about fintech companies, including their activities, products, technology stack, and financial information.