Shaktikanta Das, governor of the Reserve Bank of India (RBI), stated on Thursday that the monetary policy committee (MPC) has decided to maintain the repo rate at 6.5% while remaining prepared to act if necessary. Concerns about inflation have led the central bank to raise the rate by 250 basis points since May of last year.
Contrary to what many economists had predicted, this is the case. A Reuters poll had predicted a 25 bps rate change. Twenty of the 36 respondents anticipated that the central bank would maintain its "withdrawal of accommodation" stance, while the remaining sixteen anticipate a shift toward a neutral position.
Das stated the following regarding the financial situation and the rate revision: This decision was made based on our assessment of the macroeconomic and financial conditions with reference to information that is currently available. We have not changed the policy rate. The war against inflation must continue until we see a long-term decline in inflation closer to our target. Our work is not done yet."
The rate at which the central bank lends money to market-based commercial banks or financial institutions in exchange for government securities is known as the repo rate. The standing deposit facility (SDF) rate, which stands at 6.25 percent, is the same as the repo rate. In addition, both the bank rate and the marginal standing facility (MSF) have remained at 6.75 percent.
Das stated, in support of his argument, " The outlook is now tempered by additional downside risks from concerns about financial stability, despite the recent high frequency indicators suggesting some improvement in global economic activity. Although headline inflation is decreasing, it is still significantly higher than what central banks want. The significant two-way movements in bond yields, the decline in equity markets, and the loss of gains by the US dollar from its peak in September 2022 all indicate that these developments have increased volatility in global financial markets."
"The effective rate hike has been 290 bps," the RBI Governor continued, "but the repo rate has been raised by 250 bps in the last 11 months." Our actions must be extremely cautious. CPI was around 2% and repo was 6.5% when we began the rate cut cycle in February 2019 to support growth. As of February 2023, inflation is 6.4%, while the current policy rate is 6.5%.
"By and large expansion is above target, and financial strategy can in any case be viewed as accommodative according to current rates," he added.
Das said that the RBI has been working on taking both macro- and micro-prudential measures to keep money in one place. In addition, our supervision system has improved over the past few years. He stated, "With strong capital and liquidity buffers, including asset quality and PCR, the Indian banking system remains sound and healthy."
He went on to say that the removal of monetary policy accommodation is the primary focus of the central bank.
Shaktikanta Das, governor of the RBI, stated on Thursday, "The MPC voted by a majority of 5 out of 6 to remain focused on the withdrawal of accommodation to ensure inflation aligns with a target while focusing on growth."
The global economy is experiencing a new phase of turbulence, RBI Governor Das stated when discussing global factors. Geopolitics and economic uncertainty are at an all-time high. "Central banks are being forced to pay more attention as a result of bank failures and risks of contagion," Das stated on Thursday.
According to Governor Das of the RBI, the MPC has also decided to slightly lower the inflation forecast for FY24 to 5.2%-5.3% earlier.
Estimates of Inflation for FY24
FY24: 5.2%
Q1FY24 5.1%
Q2FY24 5.4%
Q3FY24 5.4%
Q4FY24 5.2%
He added that the national bank will keep on embracing measures to tame expansion in the country. " He stated, "Lenders need to be on the lookout for asset liability mismatch and capitalization levels, and regulators need to identify vulnerabilities to maintain the stability of the financial system." Thursday, Das stated.
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