RBI Policy Meeting 2024: MPC keeps repo rate unchanged at 6.5% for 10th time; stance changed to 'Neutral'

The repo rate is the rate at which a central bank (in the case of India, the RBI) lends money to commercial banks when they are short on funds. The term 'repo' is short for repurchase agreement. 

The status quo on repo rate was on expected lines. 

However, the members of MPC decided to change the policy stance to neutral from "Withdrawal of Accommodation."

Governor Das said that the prevailing and expected inflation, growth balance have created a congenial condition for a change in monetary policy stance to 'neutral'.

RBI Governor Shaktikanta Das, while announcing the policy on Wednesday, said that the central bank continues to focus on inflation. 

Retail inflation in August inched up to 3.65%, though vegetables and pulses witnessed price rise in double digits.

Retail inflation based on the Consumer Price Index (CPI), however, remained below the Reserve Bank's median target of 4% for the second month in a row.

It was at a five-year low of 3.6% in July. The headline inflation was 6.83% in August 2023.

The governor further said that the RBI will continue to be nimble and flexible in liquidity management operations. 

Inflation and GDP growth forecast

The GDP projection for fiscal 2025, FY25, was left unchanged at 7.2%. The FY25 CPI inflation forecast too remains unchanged at 4.5%, the governor announced.  

The MPC notes the agriculture sector is expected to perform well on the back of above-normal rainfall and robust reservoir levels, while manufacturing and service activities remain steady. On the demand side, healthy kharif sowing, coupled with sustained momentum in consumer spending in the festival season, augurs well for private consumption. Consumer and business confidence have improved.

The MPC projects Q2 GDP at 7%, Q3 at 7.4%, and Q4 at 7.4%. Real GDP growth for Q1:2025-26 is projected at 7.3%, the statement added.  

What's the MPC's take on inflation?

Headline inflation declined sharply to 3.6 and 3.7% in July and August respectively from 5.1% in June. Going forward, the September inflation print may see a significant pickup as base effects turn adverse and food prices register an upturn, the statement read. 

Food inflation, however, is expected to ease by Q4:2024-25 on better kharif arrivals and rising prospects of a good rabi season. Sowing of key kharif crops is higher than last year and the long-period average.

Sufficient buffer stocks for cereals are available for ensuring food security. Adequate reservoir levels, the likelihood of a good winter, and favorable soil moisture conditions augur well for the ensuing rabi season, though adverse weather events remain a risk. 

Firms polled in the Reserve Bank enterprise surveys expect input cost pressures to ease; however, the very recent upturn in key commodity prices, especially metals and crude oil, needs to be closely monitored.

"Taking all these factors into consideration, CPI inflation for 2024-25 is projected at 4.5% with Q2 at 4.1%; Q3 at 4.8%; and Q4 at 4.2%. CPI inflation for Q1:2025-26 is projected at 4.3%," it said.

Vote on rate and stance

Shri Saugata Bhattacharya, Professor Ram Singh, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to keep the policy repo rate unchanged at 6.50%. Dr. Nagesh Kumar voted to reduce the repo rate by 25 basis points.

Dr. Nagesh Kumar, Shri Saugata Bhattacharya, Professor Ram Singh, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted for a change in stance from withdrawal of accommodation to ‘neutral’ and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth.

Expert Take

Commenting on the policy rate status, Anuj Puri, Chairman, ANAROCK Group, said, "With the fundamentals of the Indian economy remaining strong despite global headwinds, geopolitical tensions, and inflation well within control, the RBI has once again decided to keep the repo rates unchanged at 6.5%, thus helping the housing market to maintain momentum during the festive season."

While a repo rate cut would have been preferable, it is clear that the RBI is on a tightrope walk and must keep various macro-economic factors in mind, Puri added.