Retains GDP growth projection at 7% for FY25
Mumbai: The Reserve Bank of India (RBI) on Friday kept the benchmark interest rates unchanged at 6.5 per cent for the seventh time in a row and flagged concerns over food inflation in view of IMD’s prediction of above normal maximum temperatures during April to June.
As the RBI has held key policy rates steady, EMIs on home and auto loans are likely to remain stable for some more time. The central bank has kept interest rates unchanged since February 2023.
While unveiling the first bi-monthly monetary policy for the current financial year, the RBI has retained its growth and inflation forecast for the current fiscal at 7 per cent and 4.5 per cent, respectively.
“After a detailed assessment of the evolving macroeconomic and financial developments and the outlook, it (MPC) decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.50 per cent,” RBI Governor Shaktikanta Das said.
He further said that the six-member Monetary Policy Committee (MPC) would remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.
Commenting on the RBI’s decision, SBI Chairman Dinesh Khara said the status quo should be seen as an affirmation of goldilocks for India with high growth and low inflation in FY25 and FY26.
The review of the liquidity coverage ratio (LCR) framework with the advent of 24/7 payment systems could act as a positive enabler to address frictional liquidity mismatches, Khara said.
While announcing the policy, Das said recent events outside the country have indicated that depositors withdraw or transfer their deposits using digital channels in the event of any stress quickly, and announced the review for ensuring that banks do not suffer in instances of “acute stress”.
Comprehensive review of the LCR framework would be undertaken and a draft circular will be issued shortly for stakeholder consultation.
Referring to inflation, Das said food price uncertainties continue to weigh on the inflation trajectory going forward.
Also, the tight demand-supply situation in pulses and the production of key vegetables warrant close monitoring, given the forecast of above normal temperatures during summer.
“Wheat harvesting is by and large over… wheat availability will not be affected as much as it did 2 years ago, when there were heatwave conditions starting from March. So, in wheat there is not so much concern.
“But vegetable prices will have to be watched and other impact that heat wave conditions may result in,” Das said at a post-policy briefing.
Retail inflation in February was 5.1 per cent, while food basket inflation was 8.66 per cent. For the full 2023-24 fiscal, inflation is projected at 5.4 per cent.
In the current fiscal, the RBI expects inflation to be around 4.5 per cent, with June quarter at 4.9 per cent; September quarter at 3.8 per cent; December quarter at 4.6 per cent; and March quarter at 4.5 per cent.
Recalling 7.8 per cent retail inflation in April 2022, Das said the elephant in the room at that time was inflation.
“The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.
“In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished,” Das said.
The effort, he said, is now to ensure price stability on an enduring basis, paving the way for a sustained period of high growth.
Das said the Indian economy is projected to grow at 7 per cent in the current fiscal. This would be the fourth successive year with 7 per cent or above GDP growth rate.
The Indian economy is estimated to have grown 7.6 per cent in 2023-24.
“With rural demand catching up, consumption is expected to support economic growth in 2024-25. Urban consumption stayed buoyant as evident from various indicators. The resilience in cement production, together with strong growth in steel consumption and production and import of capital goods, augur well for the investment cycle to gain further traction,” the RBI said.
Strengthening of rural demand, improving employment conditions, informal sector activity, moderating inflationary pressures, and sustained momentum in manufacturing and services sector should boost private consumption, it added.
“Improving global growth and trade prospects, coupled with our rising integration in global supply chains, are expected to propel external demand for goods and services. The headwinds from protracted geopolitical tensions and increasing disruptions in trade routes, however, pose risks to the outlook,” the RBI said.
The real GDP growth for Q1 FY25 is projected at 7.1 per cent; Q2 at 6.9 per cent; Q3 and Q4 at 7 per cent.
On policy rate transmission, Das said it continues to be a work in progress in the credit market.
“If you look at the transmission over a period of time, it is still going on. In January, we had 13 bps of increase in fresh loans. As the mobilising of deposits takes place at higher and higher rates, there will be further transmission in lending rates,” RBI Deputy Governor M D Patra said.
Patra said there is structural deficit between credit and deposit growth of about 3.5 per cent.
“That is why we have seen a flurry of efforts to raise high rate bulk deposits. They will try to protect their net interest margin, and they will pass the hikes,” he added.
