RBI Monetary Policy Meeting: Repo rate remains unchanged at 6.5%

RBI Policy Meet: Key Highlights

• Repo rate remains unchanged at 6.50%
• FY 2024 GDP forecast: 6.5% (up from 6.4% projection in the February meeting)
• FY 2024 inflation forecast: 5.1%
• Stance unchanged at Withdrawal of Accomodation

In its latest Monetary Policy meeting, the Reserve Bank of India (RBI) sounded a cautiously optimistic note about the Indian economy. Notably, the central bank kept the key policy rate i.e. the repo rate unchanged at 6.5%.

Now, let’s have a look at some of the key takeaways and their implications from the three day policy meet of the RBI.

GDP growth forecast: The RBI forecasts GDP growth for the 2023-24 period to be at 6.5%. This marks an upward revision from the 6.4% growth projected in the February meeting. Moreover, the RBI has forecasted GDP growth rates of 8%, 6.5%, 6% and 5.7% for Apr - June, Jul - Sep, Oct - Nov and Jan - Mar periods, respectively.

This upward revision in the GDP forecast has been attributed by the RBI to the favorable trends witnessed in the key economic indicators in recent times. Notably, the RBI cited growth in passenger vehicle sales, increased domestic air traffic and widespread credit expansion as tailwinds for the economy.

However, the RBI also remained cautious and highlighted some adverse developments which can derail the upward trajectory of the economy. Headwinds like geopolitical tensions, a lower-than-normal monsoon and a global economic slowdown can hurt the Indian GDP growth.

Cautious on inflation: The cooling of inflation during the months of March-April was highlighted by the RBI as the same came in at 4.7%. Additionally, this was the lowest inflation reading since November 2021.

The RBI noted that the easing of inflation was not restricted to a particular category but was across the board including the critical categories of food and fuel. Notably, the food inflation declined to 4.2% in April while the core inflation eased to 5.1%.

However, effects of the El-Nino weather phenomenon, geopolitical tensions and a sudden spurt in oil prices are negative developments that can lead to a rise in inflation, according to the RBI.

Meanwhile, for 2023-24, RBI has forecasted inflation to be at 5.1%, which is within the RBI’s inflation tolerance band of 4%-6%. On a quarterly basis, the RBI has forecasted inflation rates of 4.6%, 5.2%, 5.4% and 5.2% for Apr - June, July - Sep, Oct - Dec and Jan - Mar periods, respectively.

Other liquidity measures: The RBI has kept both the Standing deposit facility (SDF) and the Marginal standing facility (MSF) rates unchanged at 6.25% and 6.75%, respectively.

The SDF and MSF rates are critical tools for the RBI to maintain surplus liquidity in the banking system.

The SDF rate is the rate at which commercial banks deposit their excess funds with the RBI at a predetermined rate which in this case is 6.25%.

Similarly, the MSF rate is an overnight rate at which commercial banks borrow funds from the RBI for any emergency needs.

Stance remains unchanged: Despite having a somewhat bullish view on the economy and also the prevalent signs of inflation cooling, the monetary policy committee members remained cautious.

The members kept their stance unchanged and remained “focused on withdrawal of accommodation”. This is to ensure that the inflation does not go out of hand and remain within tolerable levels.

Now, let’s have a look at how RBI’s unchanged repo rate action can affect the different segments of the markets.

Impact on equity investors

The status quo maintained by the RBI along with a higher GDP forecast is expected to be a positive news for equity investors. Moreover, the easing inflation levels has also aided the growth in the equity markets in recent times.

Additionally, an expected rate cut in later policy meetings can also emerge as a possible tailwind for investors.

Impact on borrowers

The unchanged repo rate is also expected to provide relief to borrowers who have been bearing the brunt of a consistent rise in interest rates in recent times.

Critically, borrowers’ outlay on EMIs for home loans, car loans and other borrowings will also not rise.

Impact on lenders

Lending institutions like banks, non-banking financial institutions and microfinance institutions are expected to face a balanced effect due to the status quo of the RBI.

While there is expected to be no rise in Fixed Deposit rates which is expected to be a positive for their margins, the slow growth in deposit rates will not receive any impetus due to the pause in the rates.

This is not investment advice. Investments in the securities market are subject to market risk, read all the related documents carefully before investing. Past performance is not indicative of future returns.