
(Image source from: India.com)
The Reserve Bank of India (RBI) left key interest rates unchanged on Friday and remained focused on inflation amid strong economic growth, which is likely to give the new Modi government more leeway to manage reforms. Governor Shaktikanta Das said the Monetary Policy Committee, comprising three central bank governors and an equal number of foreign members, kept the repo rate unchanged at 6.50 percent for the eighth consecutive day and called for a "reversal of easing measures". He said that he takes more belligerent positions. However, there were signs in his statement that the political committee was becoming increasingly divided, with another member voting to tone down not only the direction of the policy but also its stance. Two outside committee members, Ashima Goyal and Jayant Varma, voted in favor of the cuts, compared to one in the previous meeting. The decision came days before Narendra Modi was sworn in as India's prime minister for the third consecutive time, but his party, the BJP, was forced to take power in a coalition government after its election victory fell short of expectations
The global ratings agency said a narrow majority could delay broader elements of economic and financial reforms such as land and labor and hamper progress on financial integration. Amid faster growth in India, Asia's third-largest economy, the RBI raised its GDP growth forecast for the current fiscal year to March 2025, while its inflation forecast remained unchanged at 4.5 percent to 7.2 percent. India's real GDP growth rate for the financial year 2023-24 (April 2023 to March 2024) was 8.2 percent and the inflation rate was 4.83 per cent in April, exceeding the RBI's target. Growth in FY24 was supported by a better-than-expected pace of 7.8% in the March quarter. Das pointed out that while the MPC has so far pointed to deflation without threatening growth, it remains wary of upside risks to inflation, particularly food inflation, that could derail the deflationary path. He said: "Monetary policy should be aimed at controlling inflation and keeping inflation consistently in line with our 4.0 percent target.""If price stability continues, this will provide a solid foundation for a period of high growth,” he said. He said that the RBI will continue to be flexible and flexible in its liquidity management by fine-tuning devaluation and reverse redemption operations. He said: We will use an appropriate combination of measures to adjust frictional liquidity and persistent liquidity so that interest rates in financial markets move in an orderly manner and maintain financial stability.
The central bank governor said that the central bank's monetary policy actions will be determined by domestic growth and inflation conditions, suggesting that the central bank may be willing to pre-empt the US Federal Reserve's decision to cut interest rates. He said: "I would like to make it clear that we will conduct the races according to local weather and ground conditions, keeping in mind the increase or dispersal of clouds on the distant horizon." Commenting on the MPC's decision, Radhika Rao, managing director and chief economist at DBS Bank, said there were signs of further division in the policy committee, with another member voting to soften his stance. Despite recent signs of deflation, the majority remained cautious about maintaining inflation at the 4 percent target. The combination of strong growth and above-target inflation points to an accommodative policy adjustment in 2020, reinforcing our view that a rate cut is not on the table this year,” said Suman Chaudhary, chief economist and Head of Acquire Ratings and Research.
The RBI's decision was no surprise. The RBI continued its commitment to sustained interest rate cuts and price stability without providing any details. On the currency On the policy axis, it continues to monitor upside risks to food inflation, but future revisions to the Union Budget could also be considered due to the potential for higher social spending and its possible impact on inflation. On liquidity, Chaudhary said RBIs would benefit over Rs 2,100 crore. The government was positive on short-term interest rates and absorbed excess liquidity that may arise after India's inclusion in the JPM Securities Index. He said given the tone of the MPC statement and strong expectations of domestic economic growth, they hope to attract better remittance inflows. Among other things, the RBI has increased the mass deposit limit from Rs 2,000 crore to Rs 3,000 crore, which will allow payments such as Fastag recharge. E-order balance for recurring payments and automatic transfers to UPI Lite wallets.