RBI right to keep repo rate unchanged

The MPC last raised repo rates, to the current 6.5%, in February 2023, and has maintained its hawkish stance.

On April 5, the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), by a 5-1 majority, decided to keep repo rates unchanged. Explaining the rationale behind the move, Governor Shaktikanta Das said that India’s robust growth prospects provide the policy space to remain focused on inflation, and ensure its descent to the medium-term target of 4%. This comes just days after Prime Minister Narendra Modi asked the RBI to give top-most priority to accelerating growth. When central banks need to boost growth, they cut interest rates and raise them when they need to combat inflation. However, what the RBI is essentially saying is that growth is strong enough without the RBI’s rate impetus. It reiterated its FY2025 GDP growth forecast of 7%.

The MPC made a correct decision on holding key interest rates for the seventh consecutive time. It last raised repo rates, to the current 6.5%, in February 2023, and has maintained its hawkish stance. Consumer Price Index-based inflation (CPI) came in at 5.09% in February, and has been above the MPC’s 4% target for 53 months in a row. The MPC is comfortable not raising rates either, because headline retail inflation has been consistently below the upper tolerance limit of 6% in recent months. Looking ahead, the RBI expects inflation for FY2025 at 4.5%, with the April-June quarter inflation averaging at 4.9%, July-September at 3.8%, October-December at 4.6%, and January-March at 4.5%. This projection assumes a normal monsoon. Das pointedly said that food price uncertainties continue to weigh on the inflation trajectory. While early indications point to a normal monsoon, it remains to be seen how the distribution of rainfall pans out and how the kharif season will be impacted. While core (non-food) inflation has been benign, some analysts do expect a pick-up in food prices in the October-December quarter. More importantly, there is volatility in food prices which continues to weigh on the disinflation process.

Meanwhile, due to continuing geopolitical flashpoints and global uncertainties, oil prices are at their highest since October 2023, with Brent crude crossing $90 a barrel. How this impacts fuel inflation going forward is something that the RBI will be closely monitoring. With the US Federal Reserve not expected to cut repo rates before June, an early surprise by the RBI is unlikely. Any rate cuts in India can be expected towards the end of the calendar year. The MPC has done well to maintain the status quo, at a time when the government would want more focus on growth ahead of the general elections. The RBI has taken a call based on its unmatched access to data, and data correctly shows that the signs are uncertain enough to not yet pull the trigger on interest rates.