Monetary Policy Committee Meet: RBI Keeps Repo Rate Unchanged at 6.50%

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) held its 50th policy meeting from August 6 to August 8, 2024. RBI Governor Shaktikanta Das announced the Monetary Policy decisions at the meeting.  

Citing a hike in headline inflation, the MPC decided to keep the repo rate unchanged at 6.50%. The committee has also decided to keep the standing deposit facility (SDF) rate and marginal standing facility (MSF) rate at 6.25% and the bank rate at 6.75%. These decisions were taken based on the 4:2 majority.

Withdrawal of the Accommodative Stance

Governor Das announced that the MPC remains focused on the withdrawal of accommodation. The committee’s focus remains squarely on guiding inflation back to its 4% target while ensuring that economic growth continues on its positive trajectory.

Recent inflation trends have prompted this cautious approach. After holding steady at 4.8% through April and May 2024, headline inflation increased to 5.1% in June. It was driven primarily by persistent food price pressures. Inflation, excluding food and fuel, has shown signs of moderation. Governor Das reiterated his confidence in domestic economic growth despite these inflationary concerns.

Growth and Inflation Outlook

The Committee believes that the global economic landscape continues to exhibit a mixed picture. While manufacturing activity shows signs of slowing, the services sector remains resilient. Inflation is gradually declining in major economies, albeit at a slower pace. 

Domestically, economic activity remains robust. Key indicators include:

• Steady progress in the monsoon, higher kharif sowing, and improving reservoir levels, which support agricultural output
• Accelerated manufacturing activity and strong service sector performance, with the Purchasing Managers’ Index (PMI) for services remaining above 60 for seven consecutive months
• Robust household consumption, buoyant fixed investment, and rising private corporate investment

Food prices remain a key concern on the inflation front, contributing significantly to the overall inflation rate. However, the ongoing monsoon and favourable sowing conditions are expected to bring some relief to food prices.

Based on these assessments, real GDP growth for the current fiscal year is projected at 7.2%, with a slight downward revision for the first quarter. Inflation is projected to be at 4.5% for the year, with risks evenly balanced. 

Robust Growth in the External Sector

The MPC noted that India’s current account deficit (CAD) has improved significantly, primarily due to a narrower trade deficit and robust services exports. While the trade deficit widened slightly in the first quarter of the current fiscal year, the overall CAD is expected to remain manageable. 

The external financing landscape has shown encouraging signs. Foreign portfolio investors (FPIs) turned net buyers in June 2024, with net inflows of $9.7 billion between June and early August. 

Foreign direct investment (FDI) also saw a notable increase, with gross FDI rising by over 20% during April-May 2024 and net FDI flows doubling compared to the same period last year. India’s foreign exchange reserves reached a historic high of $675 billion as of August 2, 2024. 

Other Advisory and Regulatory Measures

The MPC has highlighted several key areas requiring attention from banks and financial institutions. The central bank has observed some concerning trends in home equity loans, commonly known as top-up housing loans. 

Some banks and NBFCs are not strictly adhering to regulations governing loan-to-value (LTV) ratios, risk weights, and fund utilisation. RBI believes this laxity can divert loan funds into unproductive or speculative activities. The committee has advised banks and NBFCs to review their practices and take corrective measures to address this issue.

In a bid to curb the menace of unauthorised digital lending apps, RBI is also set to create a public repository of all digital lending apps deployed by regulated entities. This move is the latest in a series of measures to foster a safe and orderly digital lending ecosystem in India.

The repository will contain detailed information about digital lending apps operated by RBI-regulated entities. This will allow consumers to identify unauthorised platforms easily. These announcements reflect the Reserve Bank’s commitment to maintaining financial stability and protecting the interests of borrowers and lenders alike.