RBI keeps rates unchanged for the sixth time in a row

The Reserve Bank of India on Thursday decided to keep policy rate unchanged for the sixth time in a row as it maintains a tight vigil on inflation. This decision comes after an aggressive rate hike cycle that started in May 2022 in response to high inflation.

The rate increase cycle was first paused in April 2022 after six consecutive rate hikes aggregating to 250 basis points since May 2022. The hikes were meant to curb high inflation that crossed RBI’s target upper band of 6% multiple times in 2022.

Globally, inflation reached multi-decade highs in major economies in 2022 following the Russia-Ukraine war and lingering demand-supply imbalances caused by the COVID pandemic. In India too, inflation remained persistently above 6% despite rate hikes by RBI. However, it has been on a downward trajectory since October 2022.

Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das on Thursday said the Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5 per cent. He said MPC will remain watchful of food inflation so that the benefits gained are not frittered away.

By maintaining status quo, RBI wants to strike a balance between supporting economic growth which moderated in recent quarters and keeping inflation in check. India’s GDP growth is projected to slow down to about 6.5% in 2023-24 from 7% in 2022-23, and bounce back to 7% next year. A good monsoon and revival in rural demand can provide upside whereas global headwinds remain a downside risk.

This is the first bi-monthly policy following presentation of Interim Budget 2024-25 last week. The budget gave priority to capital spending aimed at job creation and rural development – in line with RBI’s accommodative stance to support growth.

Inflation has eased to a 5 handle in 2023, giving some leg room to RBI to pause further tightening. However, inflation still remains above RBI’s target range of 4%, warranting a cautious approach.

The government has mandated RBI to ensure CPI inflation at 4 per cent with a margin of 2 per cent on either side. RBI has struggled to meet its inflation targeting mandate since the pandemic hit in early 2020 when lockdowns severely impacted supply chains.

After cutting rates aggressively in 2020 to combat the economic downturn, RBI maintained status quo at record low 4% for a prolonged period even as inflation inched above 6%. It switched gears in May 2022 via its first rate hike in nearly 4 years mark a reversal of pandemic-era accommodative policies. RBI has since raised rates by over 250 basis points to combat sticky inflation – among the highest rate hikes globally.

With inflation showing some signs of easing, RBI now faces the tough balancing act of nurturing economic growth while at the same time keeping inflation expectations firmly anchored. Its policy stance over the next fiscal year will be guided by incoming data on growth and inflation. Upside risks to inflation remain in form of high global commodity prices and potential second order effects.