India's central bank kept its key interest rate on hold for the seventh straight policy meeting on Friday as economic growth is expected to remain strong while inflation remains above the 4% target level.
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India's central bank kept its key interest rate unchanged for the seventh straight policy meeting on Friday as growth in the economy is expected to remain strong while inflation remains above the 4% target level.
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 prospects provide policy space to remain focused on inflation and ensure it falls to the 4% target,” RBI Governor Shaktikanta Das said in his prepared statement.
Monetary policy should remain effective in combating inflation at this stage, Das said.
Das said inflation was the “elephant in the room” for the Indian economy two years ago.
While lower core inflation provides some relief, uncertainty over food inflation remains a concern.
Upasna Bhardwaj
Chief Economist at Kotak Mahindra Bank
“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 stay there on a permanent basis.”
But Das noted that food price volatility remains a concern, even though core inflation has fallen sharply in recent months to below 4%.
“While lower core inflation provides relief, uncertainty over food inflation remains a concern,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
“We don't see much room for any interest rate easing until the second quarter of 2024-25,” she said, referring to the July-September quarter of this year.
Five out of six members of the interest rate setting committee voted in favor of the interest rate decision, while the monetary policy stance of “easing easing” was maintained by a majority of five votes.
Status quo policy has left markets untouched.
The Indian rupee INR=IN rose slightly against the US dollar at 83.4050, just above the record low hit on Thursday, while bond yields were unchanged at 7.10%. The NSE Nifty 50 index .NSEI as well as the BSE Sensex .BSESN were trading flat.
The central bank said the Indian economy is expected to grow by 7% in fiscal year 2025, which began on April 1, unchanged from its previous forecast.
Das said that strengthening rural demand, improving business conditions, easing inflationary pressures and a sustained recovery in the manufacturing and services sectors would boost consumer demand.
India's GDP growth is expected to be 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 lowest level in two decades excluding the pandemic period. .
“We expect monetary easing to begin either through interest rate cuts or a change in stance from October 2024,” said Devendra Kumar Pant, chief economist at India Ratings & Research.
But he added that the economy's strong growth momentum may limit interest rate cuts this cycle to 50 to 75 basis points.
Retail inflation for 2024-25 is expected to reach 4.5%, Das said.
The committee believes that permanent price stability will lay strong foundations for a period of high growth, the committee said.
However, volatile food prices can change the outlook.
“The increasing incidence of climate shocks remains a key upside risk to food prices,” the rate-setting committee said in its monetary policy statement.
India is likely to see more heatwave days than usual between April and June, the country's meteorological office said earlier this week.
Build strong buffers
Despite India's strong growth and flows into equity and debt markets, the Indian rupee is still trading near record lows as the central bank chose to absorb dollar inflows to build reserves.
Das said foreign exchange reserves reached a record level of $645.6 billion as of March 29.
The data is scheduled to be officially published later on Friday.
“Our primary focus is to build a strong canopy, a strong buffer in the form of a large amount of foreign exchange reserves that will help us when the cycle turns or when there is heavy rain,” Das said.
