In the Reserve Bank of India's policy review meeting held over three days, the Monetary Policy Committee (MPC) voted to keep the policy repo rate unchanged at 6.5 percent. Accordingly, the Standing Deposit Facility and Marginal Standing Facility remained unchanged at 6.25 percent and 6.75 percent, respectively. The decision was in line with market expectations. Of the six MPC members, one member, JR Varma, voted to cut Repo rate by 25 bps. Varma voted for a rate cut in the Feb’24 meeting as well on which I will discuss later.
The MPC gave its projections for 2024-25 with CPI inflation pegged at 4.5 percent and GDP for the year pegged at 7 percent.
| RBI MPC Projections for 2024-25 (in %) | ||
| Inflation | GDP | |
| Q1 | 4.9 | 7.1 |
| Q2 | 3.8 | 6.9 |
| Q3 | 4.6 | 7.0 |
| Q4 | 4.5 | 7.0 |
| Annual | 4.5 | 7.0 |
| Source: RBI |
On inflation front, there are continued risks due to food inflation. The uncertainty over monsoons, higher than expected temperatures and low reservoir levels especially in Southern States could once again push food prices to higher levels and keep inflation above the target.
The RBI Governor Shaktikanta Das in his policy statement said that two years in April 2022 CPI inflation was elephant in the room with inflation peaking at 7.8 per cent. The recent readings suggest elephant has gone for a walk and appears to be returning to the forest. The Governor added that the RBI MPC should not be complacent and ensure that the inflation elephant remains in the forest on a durable basis.
On the growth front, Indian economy is better placed as domestic drivers signal a robust economy. However, there are several risks from external sector which could dampen the growth outlook: geopolitical tensions, volatility in international financial markets, geoeconomic fragmentation, rising Red Sea disruptions, and extreme weather events.
Economy on Stable Ground
Given the status quo nature of the economy with risks balanced, the MPC voted to keep the rates unchanged barring one member -- JR Varma. In the minutes of the last meeting, Varma had suggested that given inflation at 4.5 percent, a policy rate of 6.5 percent leads to real rate of 2 percent. The real rate of 2 percent is really high to bring inflation to the target of 4 percent. On the other hand, GDP growth rates are projected at 7 percent. As per Varma, India’s potential growth rate is 8 percent and lowering policy rates will help us achieve its potential growth rates. The MPC should take its dual mandate of growth and inflation seriously and have a real rate which helps both the targets.
It is highly likely that Varma will have similar things to say in the minutes of April meeting (MPC minutes release 14 days later). Infact, the growth numbers have increased since February meeting, leading to both arguments. One argument us that as growth rate continues to increase there is no need to lower real rate. The other argument is a lower real rate will lead to even higher growth rate.
New Announcements
Apart from status quo monetary policy, RBI also announced new Developmental and Regulatory Policies.
First, so far SEBI registered foreign investors could invest in Sovereign Green Bonds. Now, the RBI has permitted eligible foreign investors in the International Financial Services Centre (IFSC) to invest and trade in Sovereign Green Bonds.
Second, in November 2021 the central bank announced RBI Retail Direct Scheme to promote direct retail investment in Government Bonds. They now plan to introduce a mobile app to enable easer buying and selling of Government Bonds.
Third, the central bank has permitted Small Foreign Banks (SFBs) to deal in in permissible rupee interest derivative products. Until now, the SFBs were allowed to use only Interest Rate Futures (IRFs) for exchange rate hedging.
Fourth, there are measures to widen usage of UPI. Earlier, one could deposit cash in Cash Deposit Machines (CDMs) using only debit cards. Now one can deposit money using UPI as well. The central bank has also allowed UPI access for Prepaid Payment Instruments (PPIs) through third-party applications.
Fifth, the central bank has permitted non-banks to offer retail CBDC (Central Bank Digital Currency) wallets to widen the access of CBDC.
Amol Agrawal teaches at Ahmedabad University, and is the author of 'History of Private Banking in South Canara district (1906-69)’. Views are personal, and do not represent the stand of this publication.
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