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RBI extends pause, keeps repo rate unchanged at 6.5%

MPC keeps repo rate unchanged at 6.5%, raises GDP growth projection to 7%

The Reserve Bank’s Monetary Policy Committee (MPC) in June 8 meeting decided to keep the policy repo rate unchanged at 6.5% with a unanimous decision. Since May 2022, the regulator has hiked the repo rate by 250 basis points to counter the inflationary pressure. The MPC members decided by a majority of five to 1 to remain focused on the withdrawal of accommodation.

Real GDP growth projections for FY24 remained unchanged at 6.5%, with Q1 growth at 8%, Q2 at 6.5%, Q3 at 6% and Q4 at 5.7%. Domestic demand conditions for 2023-24 remain supportive of growth due to improving household consumption and investment activity. Urban demand is resilient, Rural demand is on a revival path, and Investment activity in steel consumption, cement output, and capital goods production is buoyant, with fixed investment by manufacturing companies expanding. The capex cycle is expected to gain momentum, and robust government capital expenditure is expected to nurture investment and manufacturing activity.

RBI lowered its inflation forecast for the current financial year i.e. FY24 to 5.1% from an earlier estimate of 5.2% as high inflation has begun cooling off in recent months. RBI Governor revised the inflation forecast for 2023-24 by 10 basis points to 5.1%. MPC expects inflation to be driven by food prices but El Niño will too pose a big risk to inflation, as it can affect monsoon rains and core inflation trajectory. The quarterly inflation forecast includes a cut to 4.6% in the CPI from 5.1% due to a forecast of a normal southwest monsoon by the India Meteorological Department (IMD) augurs well for the Kharif crops. The MPC has cut the forecast for Q1 2023-24 due to CPI inflation dropping to an 18-month low of 4.70 percent in April. The CPI inflation forecast for Q1 was cut to 4.6% from 5.1%, while for Q2 forecast is reduced to 5.2% from 5.4%. CPI inflation forecast for Q3 and Q4 are retained at 5.4% and 5.2%.

As RBI has maintained a wait-and-watch policy from the last 2 policy meetings, we believe RBI will continue this approach for upcoming meeting on 10 of Aug however Rate cut scenario is clearly on the cards as inflation signaled some kind of stableness.

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