MUMBAI: The Reserve Bank of India (RBI) Friday held interest rates and its monetary policy stance for the fifth consecutive review meeting on moderating price pressures, but signaled that rates will remain elevated to ensure consumer inflation retreats toward the central bank’s legally mandated target. It also bumped up the economic growth forecast for FY24 on robust demand.
Simultaneously, the central bank kept its inflation forecast unchanged amid concerns of a likely uptick in food prices it would look through, adding that it may be too early to hunt for signs of a shift in monetary policy as some distance remains for the consumer price gauge to reach the prescribed 4% target. “We have made significant progress in bringing down inflation to below 5% in October 2023 despite occasional blips due to intermittent supply shocks,” RBI Governor Shaktikanta Das said. “We are still away from our 4% target. We have said that monetary policy continues to remain actively dis inflationary. It would be a mistake to read that we are giving any kind of signal that we are moving toward neutral.”
The RBI, which shook banks and non-banking financial companies (NBFCs) with higher capital requirements for extending unsecured loans, said it ‘won’t wait for the house to catch fire and then act’, indicating the watchdog could come up with tighter measures to ensure stability when warranted.
The central bank last month ordered higher risk weights to be assigned to unsecured credit that outpaced other loan types over the past one year.
The six-member Monetary Policy Committee (MPC) voted unanimously to keep the repo rate at 6.5%. It also decided to remain focused on the ‘withdrawal of accommodation’, with one member dissenting. “Contrary to market expectations of a reprisal of hawkish communications on liquidity, the RBI steered clear of overly hawkish guidance,” said Sonal Varma, economist, Nomura Securities. “The bottom-line message seemed to be readiness to act on liquidity, bullishness on growth, and caution over upside inflation risks.”
The RBI raised its economic growth forecast for FY24 to 7%, up from 6.5%. The inflation estimate was left unchanged at 5.4%. The repo rate, or the rate at which the RBI lends to banks, remains at 6.5% and all the other rates remain where they are. An ET poll of 10 market respondents had forecast a status quo on policy rates.
The calm in international financial markets after a few tumultuous months, when the bond markets were roiled with soaring yields, has also provided comfort to the MPC in its decision.
The fall in crude oil prices after a brief surge during the year has provided comfort on the inflation outlook.
“Global commodity prices, particularly, agricultural commodity prices, have softened except rice,” said Das. “For highly import dependent food items like edible oils, international prices continue to remain soft. Domestic milk prices are stabilizing. Proactive supply-side interventions by the government are also containing domestic food price pressures. Crude oil has softened considerably.’’
Reactions of equity, bond and currency markets were mixed. The Sensex advanced 0.44% to 69,825.60, while the rupee weakened three paise to settle at 83.36 per US dollar. Yield on the 10-year benchmark bond rebounded due to profit booking to close three basis points higher at 7.27%.
Bond prices and yields move inversely. A basis point is 0.01 percentage point.
Central bankers across the world have softened the rhetoric on interest rates, though most of them including Federal Reserve Chairman Jerome Powell and European Central Bank President Christine Lagarde continue to warn about building expectations on interest rate cuts.
“Easing of inflation in the advanced economies has led to expectations of an early end to the monetary tightening cycle, shoring up market sentiments,” said Das. “Sovereign bond yields are softening as markets are not factoring in any further rate hikes.”
Source: The Economic Times