India’s CB keeps rate unchanged, retains GDP growth forecast at 6.5%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), on the basis of an assessment of the current and evolving macroeconomic situation, on Thursday decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent.

The standing deposit facility (SDF) rate remains unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 per cent, RBI Governor Shaktikanta Das said.

This is the second time that the policy rate has been paused after a 250 basis point conservative rate hike to curb inflation.

In April, the Reserve Bank of India had marginally revised upwards the 2023-24 GDP growth projection to 6.5 per cent, from its earlier forecast of 6.4 per cent.

India’s central bank kept its key lending rate steady for a second straight policy meeting on Thursday, as widely expected, but signalled that monetary conditions will remain tight for some time as it looks to further curb inflationary pressures.

Despite hitting an 18-month low of 4.70 per cent in April, analysts do not expect India’s inflation to fall to the Reserve Bank of India’s (RBI) 4 per cent medium-term target in a sustainable manner for some time. The monetary policy committee (MPC), which has three members from the RBI and three external members, kept the repo rate steady at 6.50 per cent in an unanimous decision.

India has raised rates by 250 basis points (bps) since May 2022, but surprised analysts in April by keeping them unchanged.

“It is a pause in this meeting of the MPC and I have not said anything about the pivot. Whatever I said in the last meeting - that it is not a (policy) pivot - I reiterate that,” Governor Shaktikanta Das told reporters.

All 64 economists in a Reuters poll had predicted Thursday’s outcome and some had started pencilling in rate cuts early next year.

However, India’s one-year overnight indexed swaps (OIS) rose 8 bps to 6.64 per cent while five-year OIS jumped 11 bps to 6.13 per cent, signalling markets are now pricing in a longer timeframe for rate cuts.

India’s hold on rates contrasts with recent central bank actions elsewhere.

Two major central banks -- the Reserve Bank of Australia and the Bank of Canada -- have surprised markets this week by resuming rate hikes to combat stubbornly high inflation, pushing up bond yields across developed markets.

The RBI maintained its policy stance of “withdrawal of accommodation” to ensure inflation progressively aligns with the committee’s target while remaining supportive of economic growth, Das said while announcing the MPC’s decision.

“Our goal is to achieve the inflation target of 4 per cent and keeping inflation within the comfort band of 2-6% is not enough,” Das said.

The committee “will take further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target,” the MPC’s resolution said.

“We are looking at inflation aligning with the (4 per cent) target, not at the target,” Deputy Governor Michael Patra added.

India’s benchmark 10-year bond yield was a tad higher at 7.01 per cent, against 6.99 per cent before the decision, as the central bank signalled it remained focused on bringing inflation down further. The Indian rupee was little changed at 82.5550.

“The RBI remains cautious on the inflation trajectory especially as inflation will remain above the 4 per cent target for the foreseeable future,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

“We maintain our call that the RBI will be on an extended pause,” he said.

The central bank maintained its 2023/24 economic growth projection at 6.5 per cent while it cut its retail inflation view to an average of 5.1% from 5.2 per cent earlier.

Increased capital expenditure from India’s federal government, a moderation in commodity prices and robust bank credit growth are expected to boost investment activity, the committee said. But weak global demand could pose a risk to the growth outlook, it said.

On inflation, the trajectory of food prices, which could rise if monsoon rains in India fall below normal, would be key, the committee said.

While risks remain, “domestic macroeconomic fundamentals are strengthening,” said Das.

“With growth proving to be resilient, we expect monetary policy to remain focused on aligning inflation to the 4 per cent-target by remaining on a prolonged pause till December 2023, said Gaura Sen Gupta, economist at IDFC First Bank. Das said that the central bank would remain “nimble” with its liquidity operations amid spikes in overnight rates despite surplus liquidity in the banking system.