RBI keeps interest rates unchanged, raises GDP growth forecast to 7%

New Delhi: The Reserve Bank of India (RBI) on Friday expectedly left its key lending rates unchanged for the fifth consecutive time and predicted faster growth in the world's fastest-growing major economy amid an uncertain outlook on inflation ahead of elections.

The six-member Monetary Policy Committee, consisting of three RBI and an equal number of external members, voted unanimously to keep the benchmark repurchase rate at 6.5 percent. All but one of the panel members voted to keep the policy stance at "withdrawal of accommodation" in signs that rates may remain higher for longer.

The central bank raised its forecast for economic growth to 7 percent from 6.5 percent, maintaining India's position as the world's fastest-growing major economy, after a stronger-than-expected 7.6 percent growth in the July-September quarter.

"Growth has been resilient and robust, surprising everyone," RBI Governor Shaktikanta Das said announcing the MPC decisions.

The encouraging signs, including an expanding manufacturing PMI and healthy growth in eight core industries, underline confidence in sustained robust growth.

On inflation, he said while there has been broad-based easing in core inflation, the "near-term outlook, however, is masked by risks to food inflation, which might lead to an inflation uptick in November and December".

"This needs to be watched for second-round effects, if any," he said, projecting consumer inflation at 5.4 percent for 2023-24, unchanged from its previous projection.

Going ahead, the inflation outlook would be considerably influenced by uncertain food prices, with elevated global sugar prices being a matter of concern.

The RBI has raised the repo rate by a total of 250 basis points (bps) since May 2022 in efforts to cool surging inflation, which dropped to 4.87 percent in October but is expected to remain above the 4 percent medium-term target for some time.

The governor also highlighted that "over-tightening" can also pose growth risks to the economy, and emphasised that it is not a signal that the policy stance was moving towards neutral.

Inflation remains above 4 percent and "monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations," he said.

The RBI's stance echoes the global trend of central banks signalling an enduring period of higher rates, further emphasising the need for a cautious yet progressive approach in navigating the financial landscape.

Suman Chowdhury, Chief Economist and Head Research, at Acuite Ratings & Research said the intensity of hawkishness in the policy statement has clearly subsided and a balance has been brought in.

"The statement has also addressed the market concerns on liquidity by clarifying that OMO will be adopted only if required and currently, the liquidity is already in a relatively tight mode," Chowdhury said.

Other measures announced included banks and money market participants being permitted to balance adjustments to the MSF and SDF on holidays and over the weekends. This will help in normalising the sharp swings in system liquidity and prevent excessive volatility in call money or other short-term rates.

Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, "The MPC has retained focus on 4 percent inflation being the medium target, with monetary policy actions to ensure disinflationary trends ahead. We continue to expect prolonged pause by the MPC, with liquidity tools being more closely if necessary to manage the policy stance."

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