India’s central bank kept key interest rates unchanged for the seventh consecutive policy meeting on Friday, expecting economic growth to remain strong and inflation to remain above its 4% target.
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India’s central bank kept key interest rates unchanged on Friday at its seventh consecutive policy meeting as economic growth is expected to remain strong while inflation remains above its 4% target.
six-member monetary policy committee Main lending rate maintained at 6.5%,In line with expectations. From May 2022 to February 2023, the repo rate will be increased by a total of 250 basis points.
“The strong growth outlook provides policy space to continue to focus on inflation and ensure that it falls to the 4% target,” Reserve Bank of India Governor Shaktikanta Das said in a prepared statement.
Das said that at this stage, monetary policy must maintain positive anti-inflation momentum.
Das said that two years ago, inflation was the “elephant in the room” for the Indian economy.
While lower core inflation is reassuring, uncertainty about food inflation remains a concern.
Upasna Bhardwaj
Chief Economist, Kotak Mahindra Bank
“The elephant is now out for a walk and appears to be returning to the forest. We hope the elephant will return to the forest and stay there for the long term.”
But Das noted that although core inflation has fallen sharply to below 4% in recent months, food price volatility remains a concern.
“While lower core inflation is a source of comfort, uncertainty over food inflation remains a concern,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
“We don’t see much room for rate cuts before the second quarter of 2024-25,” she said, referring to the July-September quarter of this year.
Five of the six members of the interest rate setting committee voted in favor of the interest rate decision, while the “withdrawal of accommodation” monetary policy stance was retained by a majority of five votes.
Status quo policies have left markets indifferent.
The Indian rupee INR=IN edged up to 83.4050 per dollar, just above the record low hit on Thursday, while bond yields were unchanged at 7.10%. The NSE Nifty 50 .NSEI index and the BSE Sensex .BSESN were unchanged.
The central bank said it expects India’s economy to grow 7% in fiscal 2025, which starts on April 1, in line with its previous forecast.
Das said strengthening rural demand, improving employment conditions, easing inflationary pressures and a sustained pickup in manufacturing and services should boost consumer demand.
In the fiscal year ending March 31, 2024, India’s GDP growth rate is expected to be 7.6%, but consumption, which accounts for nearly 60% of the economy, may only grow by 3%, which is the lowest level in two decades except during the epidemic.
“We expect monetary easing through rate cuts or a change in stance from October 2024,” said Devendra Kumar Pant, chief economist at India Ratings and Research.
But he added that the economy’s strong growth momentum may limit rate cuts this cycle to 50 to 75 basis points.
Das said retail inflation is expected to be 4.5% in 2024-25.
The Committee believes that sustained price stability will lay a solid foundation for rapid growth.
However, volatility in food prices could change the outlook.
“The increasing incidence of climate shocks remains the main upside risk to food prices,” the rate-setting panel said in its monetary policy statement.
India is likely to experience more than normal heat wave days between April and June, the India Meteorological Department said earlier this week.
Build a strong buffer
Despite strong economic growth and capital inflows into equity and debt markets, the Indian rupee continues to trade near record lows as the central bank opts to absorb dollar inflows to build reserves.
Das said that as of March 29, foreign exchange reserves hit a record high of $645.6 billion.
The data will be officially released later on Friday.
“Our primary focus is to build a strong protective umbrella with a strong buffer in the form of large foreign exchange reserves, which will help us when the economic cycle turns or when there is heavy rain,” Das said.
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