RBI keeps repo rate unchanged: Here’s what the banking and finance industry has to say

After raising the repo rate cumulatively by 250 basis points (one basis point is equal to 0.01%) to 6.5% between May 2022 and February this year to tame rising inflation, the MPC had hit the pause button on the benchmark lending rate in April.

SBI Chairman Dinesh Khara said RBI’s decision to pause was largely on expected lines. The communication was nuanced and tailored to anchor market expectations for the future in terms of a durable glide path of inflation.

“The bouquet of policy changes on the development front covers a wide spectrum and prioritizes resolution, risk management, and digital innovation, and addresses issues relating to market microstructure,” he said.

“Overall, the policy is an apt statement in the backdrop of a global economy that is still mired in growth-related uncertainties and labour market rigidities,” he added.

ICICI Securities Chief Economist Prasenjit Basu said: “ No surprise that the MPC has left interest rates unchanged. We expect CPI inflation to remain below 5% for several months, and the “withdrawal of accommodation” stance to be altered by August. The next policy move is likely to be a rate cut once it’s clear that the inflation fight has been won decisively.”

Yes Bank Chief Economist Indranil Pan: “There was nothing in the policy that was not expected by the market, rates and the stance both were unchanged. However, the communication, in my opinion, was slightly on the hawkish side with respect to inflation. Even as there was a 10 bps reduction in the inflation forecast for FY24, the governor was extremely pointed in highlighting that the MPC is now focused on getting inflation down to the 4% central line, rather than being comfortable with the fact that headline inflation is currently within the tolerance band and is likely to remain so for the rest of FY24.”

He added that the governor also pointed out that in H2FY24, the inflation is expected to be higher, averaging at around 5.3%, and a much closer look at the inflation at that point is warranted as by then any negative impact from the El Nino will be clear.

“Currently, the RBI has assumed a normal monsoon in the inflation projections. The communication in this policy settles the fact that one should not expect any change (read reduction) in the policy rate soon, maybe even through the rest of FY24,” he stated.

EEPC India Chairman Arun Kumar Garodia also said that the Monetary Policy Committee of the RBI, on expected lines, kept the policy repo rate unchanged at 6.5% for the second time running.

“This is a welcome move considering that a stable repo rate would provide the necessary push to the economic growth which is facing downside risks from global monetary policy tightening, stretched geopolitical tensions and volatility in commodity markets. The engineering goods shipments which account for about one-fourth of the country's merchandise exports have been witnessing a downward trend. Engineering exports from India declined 7.15% year-on-year in April 2023. Considering the external challenges facing the sector, it needs both monetary as well as fiscal policy support,” he said.

HDFC Bank, in a statement, said RBI kept its policy rate and stance unchanged today as expected. The Central bank’s commentary on growth remained upbeat while it recognised the recent easing pressure on inflation. Although, the RBI remained more cautious about the future trajectory of inflation and emphasised that it remains committed to anchoring inflation close to 4%. We think that this resolve to do “whatever is necessary” to bring inflation down on a sustained basis to the median target is likely to push forward rate cut expectations that some sections of the market had started pricing in for as early as October 2023. That said, it does not mean that the RBI will keep rates on hold until inflation actually reaches 4%.

We think that once the inflation uncertainty moderates and a path towards the 4% target are visible, the RBI could start its rate-cut cycle if growth conditions so demand. We do not see this happening before Q1 2024.

On growth and inflation, HDFC Bank said: The RBI retained its growth forecast at 6.5% for FY24 and revised up its Q1 & Q2 forecast to 8% and 6.5% respectively. For inflation, the RBI recognised the moderating near-term pressures on inflation, revising down its Q1 FY24 estimate to 4.6% (from 5.1% earlier). However, it kept its forecasts for the second half unchanged at an average of 5.3% and seemed to be more cautious – perhaps factoring in a negative impact from any food price spikes due to weather-related disturbances during the monsoon season.

For the year, the RBI only marginally revised down its inflation forecast to 5.1% from 5.2% earlier.

Shriram Finance Whole-time Director & Chief Financial Officer Parag Sharma said, “The RBI’s measures over the last two years & the Indian economy’s resilience have resulted in India’s inspiring success in taming sticking of inflation of inflation. While the CPI inflation is projected at 5.2% for FY24, it seems within manageable levels. Urban & rural demand has stabilised, cement output & import of capital goods are buoyant, and flow of resources to commercial sector have increased. Also, fixed investments by manufacturing companies rose in FY23 after dipping in FY22.

The healthy indicators have prompted the MPC to retain the policy repo rate at 6.5% -- a second successive recommendation for pause in rate hikes. However, it has still kept a tight leash on monetary conditions by continuing its strategy of withdrawal of accommodation. These are appropriate steps at the current juncture as we anticipate a normal monsoon and navigate the uncertain geopolitical situation.

Nevertheless, we are confident that India’s fundamentally strong financial ecosystem will ably support a buoyant business outlook to achieve the forecasted GDP growth of 6.5% for FY24.”

Bandhan Bank Chief Economist & Head Research Siddhartha Sanyal said: “The status quo on the repo rate in today’s MPC meeting was almost a foregone conclusion and the committee did not spring any surprise. Interestingly, despite lowering the Q1 FY24 CPI inflation forecast by 50 basis points, the CPI projection for the full year was kept almost unchanged. As expected, the RBI underscored that the vigil on inflation will remain strong as they emphasised on the importance of reaching the CPI target of 4% rather than merely staying within the tolerance band. The emphasis on achieving the 4% target and keeping the stance of policy unchanged at “withdrawal of accommodation” likely have pushed out expectations of rate cuts at the margin. Overall, the central bank is expected to keep the repo rate unchanged for several quarters, likely beyond the current calendar year. Monetary policy in India of late had been prudent, decisive and often front-loaded, a trend that is likely to continue in the foreseeable future”.

Essar Capital Ltd Senior Managing Director Sanjay Palve said: “The decision to keep the repo rate unchanged at 6.5% indicates RBI’s focus on maintaining stability and carefully withdrawing accommodative measures. The projected real GDP growth of 6.5% for FY23/24, with varying quarterly rates, brings encouraging prospects for the Indian economy. The supportive conditions of domestic demand and the promising revival of rural demand are vital drivers of sustained growth. We appreciate RBI's commitment to maintaining a delicate balance between growth and inflation containment. While headline inflation remains above the target of 4%, we believe that RBI's vigilant stance will contribute to necessary corrective measures, promoting price stability in the coming months.”