RBI hits pause for 3rd time, maintains lending rate status quo: What it means

Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday unveiled the bi-monthly monetary policy for the financial year 2023-24. The central bank maintained the status quo and kept the repo rate steady at 6.5%. The announcement came after the RBI's six member Monetary Policy Committee (MPC) held a meeting from August 8 to 10. This is the third consecutive policy meeting.

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Amid improving macroeconomic conditions, RBI has so far maintained status quo on the interest rates. Since May 2022, the central bank raised the repo rate by 250 basis points.

The RBI's monetary policy holds significance against the backdrop of the evolving economic landscape, both domestically and globally. It has crucial impact on India's economic recovery, inflation dynamics, and overall financial stability.

“RBI monetary policy has fallen much within the expectations of a dovish stance with the withdrawal of accommodation. The geopolitical scenario on the global front, inflation and extreme weather conditions are expected to put daunting challenges on the global economy. Keeping these factors under consideration, RBI has retained its growth forecast to 6.5 per cent for the current FY,” said Gurmit Singh Arora, National President, Indian Plumbing Association.

On the decision to maintain 10% incremental cash reserve ratio in scheduled banks, Sag Infotech's managing director Amit Gupta said it will have a ‘trickle-down effect on parts of Aug 12 including the economy, credit ratings and investment yields’. “For individuals, the move could result in a bit of banking and financial flexibility,” he added.

1. India's economy has continued to grow at a reasonable pace. We have made significant contribution towards controlling inflation.
2. The MPC decided unanimously to keep the policy repo rate unchanged at 6.5%. Consequently, the spending deposit facility (SDF) remains at 6.25% and the marginal spending facility (MSF) and the bank rate stand at 6.75%.
3. In effect from August 12, scheduled banks should maintain an incremental cash reserve ration (I-CRR) 10% on increase in their net demand and time liabilities between May 19 and July 28. This is purely a temporary measure for managing the current liquidity. I-CRR will be reviewed on September 8, or earlier.
4. The existing CRR remains unchanged at 4.5%. Current account deficit to remain imminently manageable in current fiscal aided by services export and high inflow of remittances.
5. The MPC also decided by a majority of five out of six members to remain focused on withdrawal of accommodation to ensure that inflation progressively alliance with target while supporting growth.
6. Q2 retail inflation to remain at 6.2 pc; Q3 at 5.7 pc and Q4 at 5.2%. Construction activities remained strong in first quarter this year.
7. Headline inflation would increase in near time owing to vegetable prices rice which will cool down in the coming months. While the vegetable price shock may reverse quickly, possible El Nino weather conditions along with global food prices need be watched closely against the backdrop of a skewed southwest monsoon so far.
8. RBI MPC remains resolute in its commitment to align inflation with the 4% target and anchor inflation expectations. The cumulative rate hike of 250 bps from FY23 is working its way through the economy
9. The cumulative rate hike of 250 basis points undertaken by the MPC so far is working its way into the economy. Nevertheless, domestic economic activity is holding up well and is likely to retain its momentum despite its weak external demand. The MPC decided to remain watchful and evaluate the emerging situation.
10. Policy stance unchanged at ‘Withdrawal Of Accommodation’ with 5 of 6 MPC members supporting for this stance.
11. India’s strong macroeconomic fundamentals have led to strong growth. India is contributing approximate 15% to global growth.
12. Role of continued supply-side interventions necessary in emerging trends and risks to price stability
13. Crude oil prices have hardened in recent weeks and its outlook is clouded by demand supply uncertainties
14. Level of surplus liquidity has gone up due to withdrawal of ₹2000 banknotes, and dividend to government
15. On FDI: Net FDI fell to USD 5.5 bn during Apr-May compared to USD 10.6 bn in corresponding period last year
16. RBI proposes framework for allowing borrowers to switch to fixed interest rate regime. It is proposed to put in place a transparent system for reset of interest rate on floating interest rate loans.