Monetary policy must continue to be actively disinflationary
– RBI Governor Shaktikanta Das
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on Thursday decided to keep its key policy rates unchanged. RBI bi-monthly Policy Committee (MPC) meeting, which commenced its meeting on February 6, and concluded its three-day deliberation today.
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Monetary Policy Statement, 2023-24 Resolution of the Monetary Policy Committee (MPC) February 6 to 8, 2024
On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (February 8, 2024) decided to:
- Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 per cent.
Consequently, 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.
- The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
2. Global growth is likely to remain steady in 2024 after a surprisingly resilient performance in a turbulent year gone by. Inflation is edging down from multi-decade highs, with intermittent upticks. Financial market sentiments have been fluctuating with changing views about an early pivot by central banks in advanced economies (AEs). The likelihood of lower interest rates has spurred rallies in equity markets, although uncertainty about the timing of interest rate reduction is reflected in bidirectional movements in the US dollar and sovereign bond yields. Emerging market economies (EMEs) are facing currency fluctuations amidst volatile capital flows.
3. Domestic economic activity is strengthening. As per the first advance estimates (FAE) released by the National Statistical Office (NSO), real gross domestic product (GDP) is expected to grow by 7.3 per cent, year-on-year (y-o-y) in 2023-24, underpinned by strong investment activity. On the supply side, gross value added (GVA) expanded by 6.9 per cent in 2023-24, with manufacturing and services sectors as the key drivers.
6. Going forward, the inflation trajectory would be shaped by the evolving food inflation outlook. Rabi sowing has surpassed last year’s level. The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events. Effective supply side responses may keep food price pressures under check. The continuing pass-through of monetary policy actions and stance is keeping core inflation muted. Crude oil prices, however, remain volatile. Manufacturing firms covered in the Reserve Bank’s enterprise surveys expect some softening in the growth of input costs and selling prices in Q4:2023-24, while services and infrastructure firms expect higher input cost pressures and growth in selling prices. Taking into account these factors, CPI inflation is projected at 5.4 per cent for 2023-24 with Q4 at 5.0 per cent. Assuming a normal monsoon next year, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 5.0 per cent; Q2 at 4.0 per cent; Q3 at 4.6 per cent; and Q4 at 4.7 per cent (Chart 2). The risks are evenly balanced.
9. Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra and Shri Shaktikanta Das voted to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. Prof. Jayanth R. Varma voted for a change in stance to neutral.
10. The minutes of the MPC’s meeting will be published on February 22, 2024.
11. The next meeting of the MPC is scheduled during April 3 to 5, 2024.
Reaction Quote | RBI Monetary Policy
Reaction Quote | RBI Monetary Policy | Shanti Ekambaram, Whole-time Director Kotak Mahindra Bank Ltd | 8th February, 2024
“ In line with the wider expectations, the MPC has maintained the status quo in both the policy rates and the stance of “ withdrawal of accommodation”. Though the CPI is pegged at 5.4% for FY’24, the expectation of inflation at 4.5% for FY’25 comes from the complete transmission of the 250 bps hikes so far, percolating fully into the economy.
The central bank has shown its nimbleness and readiness to tackle the surplus liquidity and reach the long-term objective of inflation at 4% levels on a durable basis. GDP growth is estimated at 7.3% for FY’24 – making it the third consecutive year of > 7% growth. Food remains the major risk element. Next year’s projection of 7% growth also shows the robust growth potential in India, driven by growing physical infrastructure, continued digitization and rising capex besides a steady urban consumption.
Fiscal consolidation cues in the Budget and the financial stability of the economy as seen by external and internal indicators are signs that the central bank may much comfort in. The overall domestic economic outlook exudes immense optimism as India continues to remain the bright spot in the world. ”
Reaction Quote | RBI Monetary Policy | Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank | 8th February, 2024
“RBI has retained rates and stance in expected lines. Further, the focus on necessity of inflation to settle closer to 4% remains intact suggesting RBI continues to remain cautious on inflation. We continue to expect RBI to fine tune liquidity conditions to manage the overnight to inch towards the repo rate. The change in stance could follow towards end of 1QFY25 and subsequently shallow rate cuts starting in 2HFY25.”
Reaction Quote | RBI Monetary Policy | Anu Aggarwal, President & Head Corporate Banking, Kotak Mahindra Bank | 8th February, 2024
