New Delhi, February 2024.
The Reserve Bank of India on Thursday left the repo rate unchanged at 6.50% following the conclusion of its three-day monetary policy meeting. This is the sixth consecutive time the central bank has left policy rates untouched.
The Monetary Policy Committee of the central bank also retained its stance of remaining focussed on the “withdrawal of accommodation.”
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said, “RBI has retained rates and stance in expected lines. Further, the focus on necessity of inflation to settle closer to 4% remains intact suggesting RBI continues to remain cautious on inflation. We continue to expect RBI to fine tune liquidity conditions to manage the overnight to inch towards the repo rate. The change in stance could follow towards end of 1QFY25 and subsequently shallow rate cuts starting in 2HFY25.”
Dr Niranjan Hiranandani, MD, Hiranandani Group “The status quo in repo rate by RBI is governed by a mix of global and domestic factors reflecting better anchoring of inflation and nimble liquidity management. With an outpaced GDP growth and a downward inflation curve trajectory, India’s economic performance is noteworthy despite geo-economic shocks. Development of infrastructure, increased labour employment, enhanced fiscal expenditures, improved governance, and regulations along with structural policy reforms reflect the RBI’s multifaceted approach to strengthening India’s financial stability. RBI indicates emphasises the need to consider macro-economic broad risk factors while keeping customer-centricity in mind while deploying effective monetary policy. Hence, retaining an accommodation stance even under the benign geo-political mood is a step in the right direction.”
Reactions – Anil Rego, Founder and Fund Manager at Right Horizons
“In December 2023, the annual retail price inflation in India increased to 5.7%, as opposed to the 4.9% recorded in October. Headline inflation is still impacted by food price uncertainty. The MPC is still committed to keeping inflation within the 4 percent target range.
The Gross Domestic Product (GDP) increased by 7.3%, marking the third successive year in a row. The Monetary Policy Committee has maintained the status quo on the repo rate as inflation moderates in a resilient growing economy.
Since inflation is moderating, economic activity is steady and oil prices are lower and India is poised to be the growth engine for the global economy the markets were expecting the repo rate to be unchanged at 6.5%. We believe markets in the near term will now be driven by upcoming earnings season and 2024 elections.
Markets have touched new highs, especially with earnings for the Q3FY24 coming healthy supporting the trajectory. Investors are bullish as they are favouring rate cuts in 2024 which will unanimously boost the equity markets. The banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 and in H1 of FY24 benefitting from the hikes and credit growth being robust and persistent. Prolonged rate cuts will eventually lead to narrowing NIM but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand.”
