RBI leaves interest rate unchanged; borrowing cost to largely remain stable
Mumbai: The Reserve Bank on Thursday left the key policy rate unchanged at 6.5 per cent for the sixth time, which may keep the cost of borrowings for both individuals as well as corporates largely stable, and lowered the retail inflation projection to 4.5 per cent for next fiscal.
It is exactly a year now that the repo rate or short-term borrowing rate is at 6.5 per cent. It was in February last year when the RBI hiked the repo rate and has held the policy rate since then.
About 50 per cent of the loans disbursed are benchmarked to the repo rate while the remaining are still linked with MCLR or base rate.
Announcing the decision of the rate-setting panel, Reserve Bank Governor Shaktikanta Das said that after a detailed assessment of the evolving macroeconomic and financial developments and the outlook, the Monetary Policy Committee (MPC) decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.5 per cent.
“The momentum in domestic economic activity continues to be strong. Headline inflation, after moderating to 4.9 per cent in October, rose to 5.7 per cent in December 2023. This was primarily due to food inflation, mostly vegetables.
“Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 bps policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent,” he said.
Das further said that assuming a normal monsoon next year, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 5.0 per cent; Q2 at 4.0 per cent; Q3 at 4.6 per cent; and Q4 at 4.7 per cent. The risks are evenly balanced.
The inflation trajectory, going forward, would be shaped by the outlook on food inflation, about which there is considerable uncertainty. Adverse weather events remain the primary risk with implications for the rabi crop.
Increasing geopolitical tensions are leading to supply chain disruptions and price volatility in key commodities, particularly crude oil, he added.
Observing the inflation target of 4 per cent is yet to be reached, Das said the monetary policy, in the midst of lingering uncertainties, has to remain vigilant to ensure that “we successfully navigate the last mile of disinflation”.
Stable and low inflation at 4 per cent will provide the necessary bedrock for sustainable economic growth, he added.
The central bank further said the GDP growth for 2024-25 is projected at 7 per cent with Q1 at 7.2 per cent; Q2 at 6.8 per cent; Q3 at 7 per cent; and Q4 at 6.9 per cent.
The first advance estimates (FAE) placed the real gross domestic product (GDP) growth at 7.3 per cent for 2023-24, marking the third successive year of growth above 7 per cent.
The government has mandated RBI to ensure CPI inflation at 4 per cent with a margin of 2 per cent on either side.