RBI Maintains Status Quo, Raises FY25 GDP Growth Forecast to 7.2%
- June 8, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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RBI Maintains Status Quo, Raises FY25 GDP Growth Forecast to 7.2%
Sub: Eco
Sec: Monetary Policy
Key Highlights:
- Policy Repo Rate: The Reserve Bank of India (RBI) decided to keep the policy repo rate unchanged at 6.5%, with a majority vote of 4:2.
- Monetary Policy Stance: The RBI continues with the stance of withdrawal of accommodation.
- Growth Forecast: Revised FY25 GDP growth forecast to 7.2% from the previous estimate of 7%.
Monetary Policy Committee (MPC) Decision:
- The six-member MPC maintained the repo rate at 6.5%.
- External members Ashima Goyal and Jayanth Varma voted for a rate cut of 25 basis points (bps) and a change in stance to neutral. Other four members voted in favor of maintaining the current rate and stance.
Inflation and Economic Outlook:
- Inflation Trends: Inflation is moderating, mainly driven by the core component, although food inflation remains elevated.
- Price Stability: The RBI aims to ensure inflation aligns with the target on a durable basis while maintaining economic growth.
- CPI Inflation Projection: Retained at 4.5% for FY25, with quarterly projections of Q1 at 4.9%, Q2 at 3.8%, Q3 at 4.6%, and Q4 at 4.5%.
Remarks by RBI Governor Shaktikanta Das:
- Highlighted that domestic economic activity has shown resilience, with a revival in rural demand driven by improving farm sector activity.
- Emphasized the need for price stability and monetary policy’s flexibility in addressing inflation.
- Clarified that RBI’s decisions are primarily driven by domestic growth-inflation conditions, despite monitoring global economic policies.
Perspectives:
- Nomura: The RBI’s policy decision was expected, but the vote split indicates growing divergence within the MPC.
- Goldman Sachs: Anticipates a shallow easing cycle with total 50 bps rate cuts from the RBI, likely in Q4 CY24 and Q1 CY25.
- State Bank of India: Liquidity management will be critical, and RBI may need innovative tools for liquidity augmentation.
Future Projections:
- GDP Growth: Revised upward to 7.2% for FY25.
- Rate Cut Expectations: Economists expect the first rate cut in the Oct-Dec quarter of 2024, with cumulative easing of 75 bps in FY25.
Concluding Note:
- The RBI remains focused on price stability while supporting economic growth, with inflation control being a key priority. The central bank continues to adapt its policies to meet domestic economic needs amidst global uncertainties.
Monetary Policy Committee (MPC) | |
Objective | A statutory and institutionalized framework under the Reserve Bank of India Act, 1934, for maintaining price stability, while keeping in mind the objective of growth. |
Chairman | The Governor of RBI is the ex-officio Chairman of the committee. |
Function | The MPC determines the policy interest rate (repo rate) required to achieve the inflation target (4%). |
Recommendation | An RBI-appointed committee led by the then deputy governor Urjit Patel in 2014 recommended the establishment of the Monetary Policy Committee. |
Policy Repo Rate | 6.50% |
Definition | The rate at which the central bank (RBI) lends money to commercial banks in the event of any shortfall of funds. The central bank purchases the security. |
Standing Deposit Facility (SDF) Rate | 6.25% |
Definition | A liquidity window through which the RBI gives banks an option to park excess liquidity without needing to provide collateral. |
Marginal Standing Facility Rate | 6.75% |
Definition | A window for scheduled banks to borrow overnight from the RBI in an emergency when interbank liquidity dries up completely. |
Bank Rate | 6.75% |
Definition | The rate charged by the RBI for lending funds to commercial banks. |
Fixed Reverse Repo Rate | 3.35% |
Definition | The rate at which the RBI borrows money from commercial banks within the country. This mechanism is used to control liquidity in the banking system. |
Cash Reserve Ratio (CRR) | 4.50% |
Definition | The minimum amount of deposit (NDTL) that commercial banks have to hold as reserves with the central bank. |
Statutory Liquidity Ratio (SLR) | 18.00% |
Definition | The minimum percentage of deposits that a commercial bank must maintain in the form of liquid cash, gold, or other securities. |