Policy rate unchanged at 6.5%, FY24 inflation forecast retained at 5.4%

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Friday announced its decision to continue the repo rate hike pause at 6.5 per cent for the fourth time in a row. Announcing the MPC’s decision, RBI governor Shaktikanta Das said that the decision was unanimous.

Das added that with a majority of 5:1, the MPC decided to continue to focus on the withdrawal of accommodation.

The RBI MPC had decided to first pause the rate hike in April after raising it by 250 basis points (bps) cumulatively since May 2022.

In the RBI MPC policy announcement, Das said that India is poised to become the new growth engine of the world. 

“We have identified high inflation as a major risk to macroeconomic stability and growth,” he said. He added that the RBI is committed to bringing it under the tolerance limit. 

According to official data, India’s retail inflation jumped to a 15-month high of 7.44 per cent in July, as prices of vegetables and other food items spiked. Nevertheless, the softening in prices of agricultural commodities since August has offered the MPC some breathing space, which may allow it to refrain from any rate action at the moment.

In August, the retail inflation cooled down to 6.83 per cent. However, it was still above RBI’s upper tolerance limit of 6 per cent.

Das said that inflation will cool down further in September given the softening of food prices. However, a fall in kharif sowing may pose a threat to it. 

The Centre has mandated the RBI to ensure the consumer price index (CPI)-based inflation remains at 4 per cent, with a margin of 2 per cent on either side.

Das said that for FY24, the CPI-based inflation forecast has been retained at 5.4 per cent. The forecast for Q2FY24 has been raised from 6.2 per cent to 6.4 per cent. For Q3FY24, the inflation projection has been reduced to 5.6 per cent from 5.7 per cent earlier. For Q4FY24, the projection has been retained at 5.2 per cent. 

For Q1FY25, the inflation projection has been maintained at 5.2 per cent. 

Das also said that the real gross domestic product (GDP) forecast for 2023-24 (FY24) has been retained at 6.5 per cent.