The Monetary Policy Committee (MPC), on Thursday, predictably kept the policy repo rate on hold, with indications this rate could be rock steady at 6.50 per cent for the better part of FY24, with Governor Shaktikanta Das emphasising the need to move towards the Committee’s primary target of 4 per cent retail inflation.

This is the second meeting on the trot that the six-member MPC unanimously voted to maintain the status quo on the repo rate, even as Das underscored that headline inflation still remains above the 4 per cent target and that being within the tolerance band (of 2 per cent to 6 per cent) is not enough.

In its meeting held between June 6 and 8, the six-member MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth. 

Das said: “It is obviously a pause in this meeting of MPC…Headline inflation has eased (to 4.7 per cent in April), so also all its components.

‘Resolutely focussed’
Achala Jethmalani, Economist, RBL Bank
Achala Jethmalani, Economist, RBL Bank  Achala Jethmalani, Economist, RBL Bank  
Rajani Sinha, Chief Economist, CareEdge
Rajani Sinha, Chief Economist, CareEdge  Rajani Sinha, Chief Economist, CareEdge  
Mitul Shah, Head of Research, Reliance Securities
Mitul Shah, Head of Research, Reliance Securities  Mitul Shah, Head of Research, Reliance Securities  

“But there is no room for complacency. The MPC remains resolutely focussed on the 4 per cent inflation target in the interest of sustainable growth.”

The Governor observed that the MPC’s goal and endeavour is to see that retail inflation aligns with the 4 per cent target on a durable basis and not on a one-off basis at any point in time. The primary target of monetary policy is 4 per cent.

“The policy repo rate has been increased by 250 basis points since May 2022 and is still working its way through the system. Its fuller effects will be seen in the coming months,” he said.

MD Patra, Deputy Governor, observed that the MPC’s comfort zone is when inflation aligns with the target and growth returns to potential after the shock it received from the pandemic.

“Both are works in progress. There is a little better progress on the growth front. Inflation is also progressing towards our goal, but not as fast as growth is normalising. So, we’ll look at both to take the next step.”

Das noted that headline (retail) inflation is still above the target as per the latest data and is expected to remain so according to the RBI’s projections for 2023–24.

“Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain.

“Real GDP growth in 2022–23, on the other hand, turned out to be stronger than anticipated and is holding up well,” he said.

Due to the status quo on the repo rate, deposit and lending rates are likely to be kept at current levels by banks.

Dharmakirti Joshi, Chief Economist, and Pankhuri Tandon, Senior Economist, CRISIL, opined that the MPC status quo was on expected lines as the lagged effects of past rate hikes are yet to fully play out. It also highlighted the central bank’s caution on inflation amid prevailing risks.

The CRISIL economists expect the MPC to continue its pause on policy rates in the next meeting, too, as it evaluates the inflation trajectory.

“Retail inflation has been within the RBI’s tolerance band for the past two months. That said, risks from El Nino and an uneven monsoon can shore up food prices. The RBI will likely initiate rate cuts in January–March 2024 as growth moderates,” they said.

Dinesh Kumar Khara, Chairman, State Bank of India, observed that the MPC’s decision to pause was largely in expected lines.

“The communication was nuanced and tailored to anchor market expectations for the future in terms of a durable glide path of inflation.…Overall, the policy is an apt statement against the backdrop of a global economy that is still mired in growth-related uncertainties and labor market rigidities.”

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