RBI Monetary Policy: No Rate Cuts in Sight Despite Strong Macroeconomic Fundamentals

RBI Monetary Policy: No Rate Cuts in Sight Despite Strong Macroeconomic Fundamentals

In a move that surprised many, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC) on Thursday maintained its policy stance of “withdrawal of accommodation,” signaling no imminent rate cuts despite strong macroeconomic fundamentals. The decision was driven primarily by concerns regarding persistently high inflation, which remains the apex bank’s top priority.

Speaking after the meeting, RBI Governor Shaktikanta Das emphasized the need to stay focused on controlling inflation, stating that “easing monetary policy at this juncture would be premature and unwarranted.” He pointed out that while headline inflation has moderated somewhat in recent months, it remains significantly above the central bank’s target of 4%.

According to RBI Governor Shaktikanta Das, it is incorrect to view the current situation as neutral. The Governor stated that monetary policy is still actively working to reduce inflation. The RBI declines to provide any forward advice on the trajectory of interest rates due to the uncertainty. He continued, “November’s CPI is anticipated to be high.” The RBI MPC unanimously decided to maintain the 6.5% key policy repo rate. The MPC has chosen to keep the repo rate at its current level for the fifth consecutive meeting. Remarkably, five out of six MPC members supported the removal of accommodations.

Das highlighted several factors contributing to the inflation concerns, including geopolitical tensions, supply chain disruptions, and rising commodity prices. He also acknowledged the strong rebound in economic activity, driven by robust domestic demand and a supportive policy environment. However, he cautioned against complacency, stating that the global economic outlook remains uncertain and could pose risks to India’s growth trajectory.

The MPC’s decision to hold rates steady was accompanied by a revision of its economic growth forecast for FY24. The central bank now projects GDP growth of 7%, up from the previous estimate of 6.5%. This revised projection reflects the optimism surrounding the domestic economy, fueled by pent-up demand, government spending, and ongoing reforms.

The RBI also announced several other key measures during its policy meeting. These included:

• An increase in the UPI transaction limit for hospitals and educational institutions to Rs. 5 lakh.
• A commitment to further strengthen the regulatory framework for digital lending.
• An announcement that forex reserves currently stand at $604 billion.

RBI’s December 2023 Monetary Policy Highlights:

• The repo rate is unchanged at 6.5%.
• UPI transaction limit for hospitals and educational institutions increased to Rs 5 lakh.
• GDP growth projection for FY24 revised upwards to 7%.
• The average retail inflation projection retained at 5.4%.
• Focus on controlling inflation remains a top priority.
• RBI is confident of meeting external financing requirements.
• The rupee remains stable compared to other emerging markets.
• The proposed increase in the e-mandate limit for recurring payments.
• RBI to set up a cloud facility for data security and privacy.
• The next MPC meeting is on February 6-8, 2024.
• Inflation remains above target, primarily due to food prices.
• Global economic outlook uncertain, posing risks to growth.
• RBI is cautiously optimistic about the Indian economy.
• Continued focus on controlling inflation and maintaining financial stability.

Industry Experts React to RBI’s December 2023 Monetary Policy

The RBI’s December 2023 monetary policy statement, which maintained the key repo rate at 6.5%, ignited mixed reactions from industry experts. Here’s a glimpse into their diverse perspectives:

Supportive of the decision:

• Madhavi Arora, Chief Economist at Emkay Global: “The RBI’s decision to hold rates steady is a prudent move given the evolving inflation dynamics and the uncertain global environment. The focus on controlling inflation remains paramount, and the upward revision of the GDP growth forecast reflects the optimism surrounding the domestic economy.”
• Sunil Kumar Sinha, Chief Investment Officer at Investcorp India: “The RBI’s policy stance underscores its commitment to price stability. The increase in the UPI transaction limit will further boost digital payments and financial inclusion. The overall policy statement is positive for the economy and should support investment and growth.”

Cautious optimism:

• Shubhada Rao, Chief Economist at Yes Bank: “While the RBI’s stance is understandable, it’s crucial to monitor inflation closely. Any upside risks could necessitate future rate hikes. The projected GDP growth is encouraging, but external headwinds could pose challenges.”
• DK Joshi, Chief Economist at Crisil: “The RBI’s decision is in line with our expectations. The focus on data-driven policymaking is commendable. However, the uncertain global environment and geopolitical tensions warrant continued vigilance.”

Concerns and criticisms:

• Aditi Nayar, Chief Economist at ICRA: “The RBI’s policy stance might be seen as hawkish and could dampen investment sentiment. The central bank could consider a more accommodative approach if inflation remains under control.”
• Devendra Kumar Pant, Chief Economist at India Ratings: “The RBI’s decision could impact interest-sensitive sectors like real estate and auto. The government needs to play a more active role in managing food price inflation through supply-side interventions.”

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Overall, the RBI’s latest policy pronouncements highlight the central bank’s cautious stance on monetary policy amidst a backdrop of high inflation and an uncertain global environment. While the strong fundamentals of the Indian economy offer grounds for optimism, the RBI remains focused on ensuring price stability before embarking on any significant policy easing. This cautious approach is likely to continue in the foreseeable future, with the RBI closely monitoring both domestic and global developments before making any further adjustments to its policy stance.