Interestingly, the RBI has hiked FY25 gross domestic product (GDP) growth projection to 7.2 per cent as against 7 per cent earlier, but left retail inflation forecast unchanged at 4.5 per cent. Analysts were expecting the GDP growth to be at 6.9-7 percent level for 2024-25.

The stock market cheered the hike in GDP forecast with the Sensex rising nearly one percent, or over 700 points, to the 75,814 level soon after the policy announcement.

Why did the RBI keep the rates unchanged?

The policy panel kept the repo rate unchanged in a 4:2 majority decision as inflation remains above the 4 percent target. India’s retail inflation rate was 4.83 per cent in April 2024, down from 4.85 per cent in March 2024. The overall tone of the policy remained cautious with upside risk to food inflation from current heat wave conditions.

Daily retail food prices indicate rise in food inflation pressures in the month of May 2024. “Inflation is easing but final journey of disinflation might be tough,” RBI Governor Shaktikant Das said on Friday.

Under the flexible inflation targeting regime, the RBI has to maintain consumer price-based inflation (CPI) in the 2-6 percent range. The RBI has been targeting to bring inflation down to 4 percent on a durable basis. In 2023-24, food inflation surged to 7 percent from 6.7 percent a year ago, impacted by sustained pressures from prices of cereals, pulses, spices and vegetables due to overlapping supply shocks.

MPC members appeared to be cautious on sticky food inflation owing to supply side disruptions due to the ongoing hot weather conditions in many parts of India. MPC is likely to see progress of the monsoons and sowing of the summer (Kharif) crop to assess the food inflation trajectory in the second half of calendar year 2024, before pivoting towards monetary policy easing.

Who voted for cut in repo rate?

The MPC decision to keep rates unchanged was not unanimous. Of the six-member MPC headed by the Governor, Ashima Goyal and Jayanth Varma voted to reduce the repo rate by 25 basis points to 6.25 percent. Goyal and Varma also voted for a change in stance to neutral.

What happens to lending rates if repo rate is left steady?

With the RBI leaving the repo rate steady at 6.5 per cent, all external benchmark lending rates (EBLR) that are linked to the repo rate will not rise, providing a relief to borrowers as their equated monthly installments (EMIs) on home and personal loans. will not increase.

However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250-bps hike in the repo rate between May 2022 and February 2023 has not happened.

Why has MPC hiked GDP growth?

The MPC decision to hike GDP growth forecast to 7.2 percent on the back of improving rural and urban demand conditions buoyed by monsoon forecast. The central bank upgraded its quarterly forecast for growth as well, with Q1, Q2, Q3 and Q4 now expected to grow at 7.3 per cent, 7.2 per cent, 7.3 per cent and 7.2 per cent respectively.

“During 2024-25, so far, the domestic economic activity has maintained resilience. Manufacturing activity continues to gain ground on the back of strengthening domestic demand. The 8 core industries posted healthy growth in April 2024. Purchasing Managers Index, that is PMI in manufacturing, continued to exhibit strength in May 2024 and it is indeed the highest globally,” Das said.

Das said manufacturing continued to exhibit strength in May 2024 and is the highest globally. Services sector maintained buoyancy as evident from available high frequency indicators. PMI services stood strong at 60.2 in May 2024 indicating continued and robust expansion in activity.

Why no change in monetary policy stance?

Analysts said the monetary policy stance of ‘withdrawal of accommodation’ remained unchanged in the June policy. On an average, liquidity remained in deficit in May 2024 (till May 30) at Rs 1.42 lakh crore, compared with a surplus of Rs 20,240 crore in April. A part of the reason for pressure on liquidity is limited government spending during the general elections, said Sonal Badhan, Economist at Bank of Baroda.

The RBI is expected to maintain tight liquidity in the coming months as well, to maintain pressure on short-term yields, which may in turn support the rupee. The status quo on stance signals that RBI is not in a hurry to cut interest rates anytime soon given the uncertainty on food inflation. and Fed policy outlook.

When is RBI expected to cut repo rate?

The RBI is expected to monitor the progress of monsoon and assess the Union Budget which is likely to be presented in the Parliament in July. “We push our RBI rate cut call back by one quarter to Q4 (October-December) of calendar year 2024 (CY24) vs Q3 (July-September), with the first cut most likely in the December 2024 meeting,” Goldman Sachs reported. said.

It expects a shallow easing cycle of total 50 basis points (bps) rate cuts from the RBI, with 25 bps rate cuts each in Q4 CY24 and Q1 CY25. One basis point is one-hundredth of a percentage point.

“Going ahead, we anticipate that the MPC will contemplate rate cuts in the second half of FY25,” CareEdge Ratings said. The RBI will be inclined to adopt a cautious approach, preferring to assess the evolving risks associated with food inflation before making any decisions. Additionally, with the fresh mandate in the 2024 general election, the direction of the broad policy and budgetary allocation will be crucial to observe as the new government is expected to present its budget next month, it said.