The monetary policy committee decided by a 4 to 2 majority to keep the policy repo rate unchanged at 6.5%.Four of the six members of MPC also voted to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.
Among the external members, Ashima Goyal and Jayanth R Varma voted to reduce the policy repo rate by 25 basis points (100bps = 1 percentage point), while the three RBI members and Shashanka Bhide voted to keep the rate unchanged. Das maintained that there was need for inflation to descend to the 4% target on a durable basis.
“The timing of the first rate cut by RBI remains a difficult question as domestic growth remains strong, which, along with sticky trajectory for food inflation, has meant that RBI MPC members may be reluctant to quickly pivot towards monetary policy easing,” said Santanu Sengupta of Goldman Sachs.
Adding to the uncertainty was RBI’s caution to banks on credit growth outpacing deposit growth for long. “The persisting gap between credit and deposit growth rates warrants a rethink by the boards of banks to re-strategise their business plans. A prudent balance between assets and liabilities has to be maintained,” he said. In a bid to ensure the full transmission of rate hikes to deposits, RBI revised the definition of bulk deposits to those above Rs 3 crore from Rs 2 crore earlier. According to bankers, this will compel banks that want to grow their deposits to broadbase rate hikes.
Announcing the MPC decision, Das said the forecast of above normal monsoon would boost agriculture and rural consumption. “Private consumption, the mainstay of aggregate demand, is recovering with steady improvement in discretionary spending in urban areas. Investment activity continues to gain traction on the back of expansion in non-food credit,” said Das.
RBI’s decision to hold rates comes a day after the European Central Bank cut interest rates and a month after US Fed chief Jerome Powell said that rate hikes were off the table. “There is a view that in matters of monetary policy, RBI is guided by the principle of following the Fed. I would like to unambiguously state that while we do keep a watch on the clouds that build up or clear out on the distant horizon, we play the game according to the local weather and pitch conditions,” the governor said.
According to RBI forecasts, inflation will briefly come within the target rate during the second quarter, thanks to a higher base effect. However, the inflation for FY25 has been retained at 4.5% – still above the target rate of 4%.
