RBI holds rates, vows to keep price stability

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

Reserve Bank of India (RBI) Governor Shaktikanta Das announces the central bank’s monetary policy statement, Thursday, June 8, 2023. | Photo Credit: PTI

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 June 8 decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%

The standing deposit facility (SDF) rate remains unchanged at 6.25% and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%, 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.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth, he said.

“These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth,” he added. 

On the outlook, Mr. Das said going forward, the headline inflation trajectory was likely to be shaped by food price dynamics. Wheat prices could see some correction on robust mandi arrivals and procurement. 

Milk prices, on the other hand, are likely to remain under pressure due to supply shortfalls and high fodder costs. The forecast of a normal south-west monsoon by the India Meteorological Department (IMD) augurs well for kharif crops; however, the spatial and temporal distribution of the monsoon would need to be closely monitored to assess the prospects for agricultural production, he said.

“Crude oil prices have eased but the outlook remains uncertain. According to the early results from the Reserve Bank’s surveys, manufacturing, services and infrastructure firms polled expect input costs and output prices to harden,” he said.

Taking into account these factors and assuming a normal monsoon, CPI inflation has been projected at 5.1% for 2023-24, with Q1 at 4.6%, Q2 at 5.2%, Q3 at 5.4% and Q4 at 5.2%. The risks are evenly balanced.

On growth, Mr. Das said higher rabi crop production in 2022-23, the expected normal monsoon, and the sustained buoyancy in services should support private consumption and overall economic activity in the current year.

The government’s thrust on capital expenditure, moderation in commodity prices and robust credit growth are expected to nurture investment activity. Weak external demand, geoeconomic fragmentation, and protracted geopolitical tensions, however, pose risks to the outlook, he added.

Taking all these factors into consideration, real GDP growth for 2023-24 has been projected at 6.5% with Q1 at 8.0%, Q2 at 6.5%, Q3 at 6.0%, and Q4 at 5.7%, with risks evenly balanced, he further said.