The Reserve Bank of India's Monetary Policy Committee (MPC) held back policy repo rate at the current level of 6.50 per cent while retaining the stance at “focused on withdrawal of accommodation.” While the status quo decision on policy rates was widely anticipated, some quarters of the market were expecting shifting of stance to “neutral”, given that inflation has softened, policy tightening has nearly peaked and liquidity conditions have also moderated comparatively. While acknowledging that inflation has begun to show signs of moderation, RBI voiced concern over inflation ruling above target and emphasized the need to bring it down towards the target rate of 4 per cent. Given that inflation has still some way to go in terms of reaching the target, the trajectory of future policy actions remains uncertain, according to RBI. The status quo decision on policy rate was unanimous, while Prof. Varma yet again expressed reservation on the stance. The decision to leave stance unchanged has been premised on the fact that liquidity continues to remain in surplus mode and is expected to improve further (with Rs. 2000 note being deposited back into the banking system) and inflation continues to remain above target.

Inflation and GDP Projections

The inflation projection was revised downwards mildly to 5.1 per cent for FY 2023-24 from April policy projection of 5.2 per cent with 50 bps downward revision in Q1 estimate (4.6 per cent from April estimate of 5.1 per cent). MPC’s resolve to bring inflation further down towards the target remains unrelenting and can be understood from this statement “headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4.0 per cent, going forward.” The GDP forecast on the other was retained at 6.5 per cent for the year, though inter quarter projections were changed possibly to factor in the better-than-expected Q4 growth figure for Q4 of FY 2022-23 (higher base of Q4 FY 2023 leading to moderation in Q4 FY 2024 GDP projection). On growth, RBI sounded largely positive with domestic factors such as private consumption, investment activity to support growth. Risks to growth according to RBI are largely exogenous, comprising of external headwinds, geopolitical tensions, intensity of El Nino and volatility in global financial markets.