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RBI Maintains Status Quo on Monetary Policy Rates Amidst Strong Economic Momentum

The Reserve Bank of India (RBI) concluded its Monetary Policy Committee (MPC) meeting on April 5, 2024, with the decision to keep the policy repo rate unchanged at 6.50 per cent. The standing deposit facility (SDF) rate remains steady at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate are maintained at 6.75 per cent.

The MPC, in its assessment of the current and evolving macroeconomic situation, acknowledged the robust momentum in the domestic economy. Real gross domestic product (GDP) expanded at 7.6 per cent in 2023-24, driven by buoyant domestic demand and strong investment activity. Manufacturing and construction sectors were particularly notable contributors to gross value added growth, which recorded a 6.9 per cent increase.

Looking ahead, expectations of a normal south-west monsoon are anticipated to support agricultural activity, while manufacturing and services sectors are expected to maintain their momentum. Private consumption is forecasted to strengthen further, supported by a pick-up in rural activity and steady urban demand. Despite geopolitical tensions and volatility in international financial markets posing risks to the outlook, the MPC projects real GDP growth for 2024-25 at 7.0 per cent, with evenly balanced risks.

Recalling the past couple of years Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution Pvt Ltd stated “The RBI’s policy has closely mirrored that of the Federal Reserve, and this trend persists. However, in the current Monetary Policy Committee (MPC) meeting, the governor highlighted how inflation is gradually decreasing and emphasized the robust growth in India’s economic landscape.”

On the inflation front, headline inflation softened to 5.1 per cent during January-February 2024, with food inflation edging up primarily due to certain food items. The MPC anticipates continued uncertainties in food prices and acknowledges the impact of unpredictable supply-side shocks from adverse climate events. However, assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent, with risks evenly balanced.

These domestic conditions of diminishing inflation and promising growth prospects set the stage for a potential rate cut. We anticipate that in the upcoming MPC meetings, the RBI will likely announce a rate cut ranging from 25 to 50 basis points, provided the current conditions continue to improve. Interestingly, the impact of rate increases has had minimal effect on the demand for home loans, which continues to rise. At Andromeda, we have observed approximately a 25% growth in the total disbursement of loans, including home loans, loans against property, and personal loans, during FY24, further added Kapoor.

Dr. Shashanka Bhide, Dr. Ashima Goyal, Dr. Rajiv Ranjan, Dr. Michael Debabrata Patra, and Shri Shaktikanta Das voted to keep the policy repo rate unchanged and to remain focused on withdrawal of accommodation to ensure inflation progressively aligns with the target, while supporting growth. Prof. Jayanth R. Varma voted for a reduction in the policy repo rate by 25 basis points and for a change in stance to neutral.