RBI Monetary Policy Update June24: Repo Rate Unchanged at 6.5%

Mumbai, June 7, 2024 – The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announced its bi-monthly policy decision today, opting to keep the key policy repo rate unchanged at 6.5% for the eighth consecutive time.

The decision, which comes in the immediate aftermath of the 2024 Lok Sabha election results, reflects the central bank’s focus on supporting economic growth while keeping inflation within the target range.

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Key Highlights from the June 2024 MPC Meeting.

1. Repo Rate Unchanged at 6.5%
   • The RBI has decided to keep the repo rate steady at 6.5%, marking the eighth consecutive meeting without a rate change. This decision aligns with market expectations, given the robust growth momentum in the economy and the current inflation trends.
2. Inflation Trends
   • Retail inflation hit an 11-month low of 4.83% in April 2024, slightly down from 4.85% in March 2024. Despite this decline, the inflation rate remains higher than the April 2023 level of 4.70%. The RBI aims to achieve a durable alignment with the 4% inflation target by the second half of FY25.
3. GDP Growth Projections
   • The RBI has revised its GDP growth forecast for FY25 to 7%, reflecting strong economic performance. The growth projections for the first quarter (Q1) of FY25 stand at 7.1%, with subsequent quarters expected to maintain a similar growth trajectory.
4. Liquidity Management
   • The RBI absorbed surplus liquidity aggregating ₹44,430 crore through two variable rate reverse repo (VRRR) auctions. This move is part of the central bank’s efforts to manage liquidity and ensure stability in the financial system.
5. Impact of General Elections
   • The recent general elections resulted in a coalition government, which may influence fiscal policies and inflation. The RBI’s current inflation projection assumes the government’s continued focus on fiscal consolidation.

Announcing the MPC’s decision, RBI Governor Shaktikanta Das stated, “The MPC unanimously decided to keep the policy repo rate unchanged at 6.5%. The stance remains focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.”

Expert Opinions on RBI Monetary Policy .

1. Kaushik Das, Chief Economist, Deutsche Bank
   • Das expects the RBI to maintain its CPI inflation and real GDP growth forecasts for FY25 at 4.5% and 7.0% respectively. He highlights the importance of liquidity management and the evolution of effective interest rates in money markets.
2. Atul Monga, CEO & Co-founder, BASIC Home Loan
   • Monga anticipates potential repo rate cuts later in the year, possibly around October 2024. He suggests that inflation forecasts might be revised down slightly, while GDP growth predictions are expected to remain stable.
3. Amit Somani, Senior Fund Manager, Tata Asset Management
   • Somani emphasizes the RBI’s focus on bringing down inflation to 4%, signaling that policy rates may remain higher for longer until inflation is projected to come below this target.

Historical Context and Interesting Facts

1. Establishment and Evolution
   • The RBI was established on April 1, 1935, based on the recommendations of the Hilton Young Commission. Initially a private shareholder’s bank, it was nationalized in 1949. The RBI has played a pivotal role in India’s economic development, particularly in agriculture, industry, and finance.
2. Role in Economic Development
   • Over the years, the RBI has been instrumental in setting up various institutions to support the financial infrastructure of the country, such as the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, and the National Bank of Agriculture and Rural Development.
3. Monetary Policy Framework
   • The primary objective of the RBI’s monetary policy is to maintain price stability while supporting economic growth. The flexible inflation targeting framework, implemented in 2016, provides a statutory basis for this approach.

Economic Outlook.

The RBI has maintained its GDP growth projection for the fiscal year 2024-25 at 7%, citing the robust growth momentum in the economy. India’s GDP grew by an impressive 7.8% in the January-March quarter and 8.2% in the full year 2023-24, surpassing expectations.

Governor Das highlighted that the outlook for the Indian economy remains bright, supported by a normal monsoon forecast, moderating inflationary pressures, and sustained momentum in the manufacturing and services sectors. However, he cautioned that increasing incidence of climate shocks imparts considerable uncertainty to the food inflation and overall inflation outlook.

Inflation Dynamics.

Retail inflation, a key consideration for the RBI, reached an 11-month low of 4.83% in April 2024, slightly lower than the March print of 4.85%. This figure has remained within the RBI’s target range of 2-6% for the fourth consecutive month.

The central bank has maintained its inflation forecast for 2024-25 at 4.5%, with Q1 at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 at 4.5%. Governor Das emphasized that the RBI remains vigilant on the inflation front and will continue to monitor the evolving inflation dynamics closely.

Liquidity and Regulatory Measures.

The RBI announced that it will continue to conduct variable rate repo (VRR) auctions of different tenors to manage liquidity conditions and align the weighted average call rate (WACR) with the policy repo rate. The central bank also extended the deadline for meeting the last tranche of the capital conservation buffer (CCB) by six months to October 1, 2024, providing relief to banks amid the ongoing economic recovery.

Fiscal Prudence and Government Spending.

This monetary policy announcement comes on the heels of the 2024 Lok Sabha election results, which saw the formation of a coalition government. Economists and market participants are keenly watching for signs of populist spending measures in the upcoming budget, which could have implications for the inflation trajectory and fiscal consolidation roadmap.

RBI Governor Das subtly cautioned the new government on the importance of fiscal prudence, stating, “The government’s continued commitment to fiscal consolidation and the quality of expenditure will be crucial in maintaining macroeconomic stability and anchoring inflation expectations.”

Balancing Act: Growth vs Inflation.

The RBI’s decision to maintain the status quo on interest rates reflects the delicate balancing act the central bank is performing between supporting economic growth and keeping inflation under control. With the economy showing strong signs of recovery post-pandemic, the RBI has chosen to prioritize stability and avoid any premature tightening of monetary policy.

However, the central bank remains data-dependent and stands ready to act if inflation risks materialize. Governor Das reiterated, “The RBI remains committed to its primary mandate of price stability while keeping in mind the objective of growth. We will continue to monitor the evolving macroeconomic and financial conditions and take appropriate action as necessary.”

Market Reaction and Future Expectations.

The RBI’s policy decision was largely in line with market expectations, with most economists and analysts predicting a status quo on rates. Bond yields remained stable following the announcement, with the 10-year benchmark government bond yield trading around 6.85%.

Looking ahead, market participants expect the RBI to maintain its accommodative stance in the near term, given the uncertain global economic environment and the need to support the ongoing recovery. However, some economists believe that the central bank could consider rate hikes in the latter part of the fiscal year if inflationary pressures intensify.

Wrapping Up.

The RBI’s June 2024 monetary policy decision reflects the central bank’s cautious approach in an uncertain economic landscape. By keeping the repo rate unchanged at 6.5% and maintaining its focus on withdrawal of accommodation, the RBI has signaled its commitment to price stability while supporting growth.

As the Indian economy navigates the challenges posed by global headwinds, climate shocks, and domestic political developments, the RBI’s role in maintaining macroeconomic stability becomes even more crucial. Governor Shaktikanta Das and his team at the central bank will need to continue their deft balancing act, ensuring that monetary policy remains responsive to evolving conditions while anchoring inflation expectations and supporting sustainable growth.

The road ahead for the Indian economy looks promising, but not without its fair share of risks. As the RBI maintains a watchful eye on the inflation trajectory and the impact of government policies, market participants and policymakers alike will be closely monitoring the central bank’s actions and guidance in the coming months. The RBI’s ability to navigate these challenges will be key to ensuring a stable and prosperous future for the Indian economy.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.