In its initial session of FY 25, the Reserve Bank of India’s monetary policy committee (MPC) opted to maintain the key repo rate at 6.5 percent, aligning with market expectations. The committee’s focus remains steadfast on curbing inflation, retaining the stance unchanged as a move towards withdrawal from accommodation.
The repo rate denotes the rate at which the central bank lends funds to commercial banks for short-term purposes.
Between May 2022 and February 2023, the MPC hiked the repo rate by 250 basis points (bps). However, it has since maintained it at a steady level. One basis point equals one-hundredth of a percentage point.
While headline inflation has experienced a decline in recent months, registering at 5.09 percent in February compared to 5.1 percent in the prior month, core inflation also eased to 3.3 percent. Core inflation, focusing on non-food and non-oil components, serves as a crucial indicator for policy formulation.
Despite inflation remaining within the RBI’s tolerance band of 2 to 6 percent for six consecutive months, it has continued to surpass the medium-term target of 4 percent for 53 consecutive months.
RBI Governor Shaktikanta Das emphasized the importance of achieving a sustainable 4 percent target for CPI inflation, stating that although inflation is on a downward trajectory, the aim is for it to consistently hover around 4 percent.
While the US Federal Reserve chose to maintain its key rates unchanged while expressing caution regarding inflation, economists at Emkay Global believe it is improbable for the Indian central bank to precede the Fed in rate adjustments.
On the economic growth front, India witnessed a notable expansion of 8.4 percent in the final quarter of 2023, marking its swiftest growth in 18 months, primarily driven by robust manufacturing and construction activities. The government has revised its growth projection for 2024 to 7.6 percent from the previous estimate of 7.3 percent.
