RBI MPC: Repo Rate unchanged; inflation pegged at 3.1%, GDP growth projected at 6.5%

Kolkata: The six-member rate-setting Monetary Policy Committee of the Reserve Bank of India preferred to keep the Repo Rate unchanged at 5.5% and wait for the transmission of the 100-basis point cut between February and June to fully play out in the financial system and trigger demand. The decision to keep the rate unchanged was unanimous, said RBI governor Sanjay Malhotra on the morning of August 6.

For the common man, it basically means it will not signal any change in the interes rates on loans, or EMIs of ongoing borrowings. On the flip side, it will also not nudge for the banks to cut deposit rates on savings accounts or FDs. 

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A section of analysts including the think tank of the State Bank of India (SBI Research) thought that the central bank apex body would opt for a rate cut of 25 basis points, front loading the gun to boost demand in the economy which has remained at rates which are not to the expectation of the policymakers. Such a cut would have resulted in another round of slashing of interest rates on all categories of loans by banks, which have cut them once after the jumbo cut by 50 basis in June.

The RBI governor said that the inflation footprint is likely to rise from Q2 to Q4 of the current financial year. According to the central bank projections, the retail inflation rate is likely to be 2.1% for Q2, 3.1% for Q3 and 4.4% for Q4 of the current financial year. For the first quarter of the next financial year, it could rise to 4.9%. For this financial year, however, RBI slashed its retail inflation forecast from 3.7% (announce din June) to 3.1%. After announcing the rate cut of 50 basis points in June, the RBI governor forecast the inflation rates as follows -- 3.9% in Q1, 3.4% in Q2, 3.9% in Q3 and 4.4% in Q4.

Explaining the rise in inflation towards the later part of this year, Malhotra attributed it partly to the lower base effect and the result of the measures the bank is taking to stimulate growth. Moreover, he also issued a veiled caution and said that food prices are extremely volatile, indicating thereby that in the food inflation rises, it could easily upset the sweet spot of retail inflation.

He also emphasised that the current cooling of CPI-based inflation is substantially due to the drop in food inflation with vegetable and pulses prices recording double-digit deflation in June.

RBI kept the growth forecast unchanged at 6.5% this year despite the tariff-related uncertainty in the external sector and tepid demand of discretionary spending and subdued industrial growth output. The GDP growth rate is expected to touch 6.6% in Q1 of the next financial year (FY27). The quarterwise growth rates could be 6.5% for Q1, 6.7% for Q2, 6.6% for Q3 and 6.3% for Q4 this year, the RBI governor said.

The tailwinds as mentioned by the RBI governor were expected growth in services sector, robust capex by the government and strong performances by the construction and trade sectors.

Malhotra was also optimistic about the agricultural sector, boosted by the southwest monsoon which is not only positive for the Kharif season but also holds promise for the Rabi crop. The water levels of the major reservoirs are also being replenished to satisfaction, he said.