India’s central bank kept its key interest rate on hold for a seventh straight policy meeting on Friday as growth in the economy is expected to remain strong while inflation remains above its 4% target.
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India’s central bank’s key interest rate was kept unchanged for a seventh consecutive policy meeting on Friday as growth in the economy is expected to remain strong while inflation remains above the 4% target.
The six-member monetary policy committee kept the key lending rate at 6.5%, in line with expectations. The repo rate was raised by a total of 250 basis points between May 2022 and February 2023.
“The strong growth outlook provides policy room to remain focused on inflation and ensure its descent to the 4% target,” RBI Governor Shaktikanta Das said in his prepared statement.
Monetary policy needs to remain actively deflationary at this stage, Das said.
Inflation was the “elephant in the room” for the Indian economy two years ago, Das said.
While low structural inflation provides comfort, uncertainty over food inflation remains a concern.
Upasna Bhardwaj
chief economist, Kotak Mahindra Bank;
“The elephant has now gone for a walk and seems to be returning to the forest. We would like the elephant to return to the forest and remain there on a permanent basis.”
However, Das pointed out that food price volatility remains a concern, although core inflation has fallen sharply in recent months to below 4%.
“While low core inflation provides comfort, uncertainty over food inflation remains a concern,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
“We don’t see much room for any rate easing until the second quarter of 2024-2025,” she said, referring to the July-September quarter this year.
Five out of six members of the rate-setting committee voted in favor of the rate decision, while the monetary policy of “withdrawal of accommodation” was maintained by a five-vote majority.
The status quo policy left the markets unmoved.
The Indian rupee INR=IN gained slightly against the US dollar at 83.4050, just above Thursday’s record low, while bond yields were unchanged at 7.10%. The NSE Nifty 50 .NSEI as well as the BSE Sensex .BSESN traded flat.
The central bank said the Indian economy is expected to expand by 7 percent in the 2025 fiscal year, which began on April 1, unchanged from its previous forecast.
Strengthening agricultural demand, improving employment conditions, easing inflationary pressures and continued recovery in the manufacturing and services sectors should boost consumer demand, Das said.
India’s GDP growth is seen at 7.6% in the year ending March 31, 2024, but consumption, which makes up nearly 60% of the economy, is likely to grow just 3% – the slowest in two decades. outside of the pandemic period.
“We expect monetary easing either through a rate cut or a change in stance to start from October 2024,” said Devendra Kumar Pant, chief economist at India Ratings & Research.
However, he added that the economy’s strong growth momentum may limit rate cuts this cycle to 50 to 75 basis points.
Retail inflation for 2024-25 is seen at 4.5%, Das said.
The committee believes that continued price stability will lay a strong foundation for a period of high growth, it said.
However, volatile food prices could change the outlook.
“The increasing frequency of climate shocks remains a key upside risk to food prices,” the interest rate-setting committee said in its monetary policy statement.
India is likely to experience more heatwave days than normal between April and June, the country’s meteorological service said earlier this week.
Building strong buffers
Despite India’s strong growth and inflows into equity and debt markets, the Indian rupee continues to trade near record lows as the central bank has opted to absorb dollar inflows to build reserves.
Foreign exchange reserves hit a record high of $645.6 billion on March 29, Das said.
The figures are due to be officially released later on Friday.
“It is our primary focus to build a strong umbrella, a strong buffer in the form of a significant amount of foreign exchange reserves that will help us when the cycle turns or when it rains heavily,” Das said.