In a recent development, the Reserve Bank of India (RBI) decided to keep its key interest rate unchanged, which was in line with market expectations. The Monetary Policy Committee (MPC) voted to retain the repo rate at 6.50%, marking the ninth consecutive policy meeting where the rate remained the same. This decision was supported by four out of six MPC members, with the last rate change occurring in February 2023.
The MPC’s primary focus is on bringing inflation down towards the target, with the monetary policy stance remaining at ‘withdrawal of accommodation’. RBI Governor Shaktikanta Das highlighted the importance of staying on course to achieve price stability, especially considering India’s persistent food inflation. While acknowledging the country’s resilient growth and downward trending inflation, Governor Das emphasized the need to cover more ground in terms of achieving the 4% medium-term inflation target.
Following the RBI’s decision, Indian shares traded lower, with both the NSE Nifty 50 index and the S&P BSE Sensex experiencing a 0.4% decline. The 10-year benchmark bond yield marginally increased, while the Indian rupee remained relatively stable against the dollar. Investors were hopeful for a possible shift in the RBI’s inflation stance, given the recent global market volatility and expectations of an interest rate cut by the Federal Reserve in September.
Despite the challenges posed by global market volatility and the move towards rate cuts by other central banks, Governor Das reiterated that domestic considerations would take precedence in determining India’s monetary policy. The RBI maintained its growth forecast for fiscal 2025 at 7.2%, slightly slower than the previous year, while keeping the inflation forecast at 4.5% for the current year. The annual retail inflation rate had risen in June, exceeding 5% due to a surge in food prices.
Economists like Upasna Bhardway from Kotak Mahindra Bank anticipate a possible change in policy stance in the upcoming October meeting, with potential rate cuts starting in December. Despite the growing expectations of a rate cut by the Federal Reserve and the global economic uncertainties, the RBI remains committed to its mandate of maintaining price stability and supporting sustainable growth. The governor’s policy guidance reaffirmed the prioritization of domestic factors over external influences, signaling a cautious approach towards future monetary decisions.
The recent RBI monetary policy decision reflects a balance between addressing domestic economic concerns and navigating through the challenges posed by global market volatility. While the central bank remains vigilant about inflation and growth targets, the evolving economic landscape and external factors will continue to shape its policy stance in the coming months.