The Monetary Policy Committee (MPC) of the Reserve Bank of India has decided to maintain the status quo on interest rates for various loans, including home, vehicle, and personal loans. The Repo rate remains unchanged at 6.5 percent in the monetary policy review, despite concerns about inflation due to a recent surge in vegetable prices. The central bank has retained the monetary policy stance as ‘withdrawal of accommodation.’ Additionally, with a better-than-expected 7.6 percent growth in the second-quarter gross domestic product (GDP), the RBI has revised the growth estimate for FY 2024 upward to 7 percent from the initial 6.5 percent. The inflation estimate for the fiscal year remains steady at 5.4 percent.
Currently, there are no changes anticipated in lending and deposit rates. While some retail loan segments may see increased costs due to the recent rise in risk weights on retail loans by the RBI, certain banks have raised savings bank deposit rates in specific segments. External benchmark lending rates tied to the repo rate will not experience an increase, providing relief to borrowers as their EMIs will remain stable. In response to the cumulative 250 bps hike in the policy rate since May 2022, banks have adjusted their repo-linked EBLRs accordingly. The one-year median MCLR rose by 152 bps from May 2022 to October 2023. Additionally, the WALRs on fresh and outstanding loans increased by 187 bps and 111 bps, respectively, between May 2022 and September 2023. On the deposit side, the WADTDRs for fresh and outstanding rupee deposits saw increases of 229 bps and 166 bps, respectively.
The Reserve Bank of India (RBI) has opted to maintain the Repo rate, the rate at which it lends funds to banks for short-term needs, unchanged. This decision by the six-member rate-setting panel, led by Governor Shaktikanta Das, aims to strike a balance between managing retail inflation and fostering economic growth. With an anticipation of rising inflation due to factors like increasing food prices, particularly onions and tomatoes, there is no justification for contemplating a reduction in the repo rate. Core inflation hovers around 4 percent, providing no grounds for the RBI to consider a rate hike.
Consumer price-based inflation (CPI) eased to 4.87 percent in October, slightly down from 5.02 percent in September but still exceeding the RBI’s 4 percent target. Governor Das emphasizes the importance of vigilance in the face of recurrent food price shocks and adverse weather events affecting inflation. The focus remains on achieving the 4 percent inflation target while actively supporting economic growth.
In the latest policy review, Das acknowledges that the near-term inflation outlook is obscured by food inflation risks, potentially leading to an uptick in November and December. The central bank will closely monitor these developments for any second-round effects. Despite this, there has been a broad-based easing in core inflation, indicating successful disinflation through monetary policy actions.
This marks the fifth consecutive monetary policy review where the MPC has opted to keep the repo rate steady at 6.5 percent. The last adjustment saw an increase from 6.25 percent to 6.5 percent in February 2023. Between May 2022 and February 2023, the policy rate experienced a cumulative increase of 250 basis points.
The RBI has chosen to uphold the policy stance as the ‘withdrawal of accommodation’ in a 5:1 majority decision. The decision stems from the observation that despite a 250 basis points hike in the repo rate, the transmission has not been fully realized. Examining the weighted average lending rates and deposit rates of banks reveals a remaining gap of 50 basis points in lending rates. Consequently, the stance will persist as ‘withdrawal of accommodation.’
To enhance interest rate transmission, the RBI is anticipated to maintain system liquidity at a slightly deficit level. This approach has already been evident in November. With increased government bond redemptions this month and the likelihood of higher Foreign Portfolio Investment (FPI) flows, the RBI may employ tools such as Open Market Operations (OMO) to absorb excess liquidity from the market.
The RBI has revised its growth forecast for FY2024 from 6.5 percent to 7 percent following a second-quarter GDP growth of 7.6 percent, surpassing the earlier estimate of 6.5 percent. The central bank has maintained the headline inflation forecast for the current fiscal at 5.4 percent. The robust growth of 7.7 percent in the first half of FY24, driven by second-quarter GDP exceeding expectations, prompts the upward revision. However, the RBI anticipates a growth moderation in the second half due to factors like El Nino’s impact on rainfall affecting agricultural output and rural demand. Some high-frequency indicators indicate weaknesses in rural incomes, including two-wheeler and FMCG sales and increased demand for MGNREGS.
