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RBI Policy: Repo Rate Decision and Economic Outlook

reserve bank of india

As the Reserve Bank of India (RBI) gears up to announce its latest monetary policy following the Monetary Policy Committee (MPC) meeting from June 5-7, 2024, all eyes are on the repo rate decision. According to a Reuters poll conducted between May 17-30, there is a strong expectation that the RBI will maintain the current benchmark repo rate at 6.50%.

What is repo rate?

The repo rate, or repurchase rate, is the interest rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. It is a critical tool used by the RBI to regulate the liquidity, inflation, and overall money supply in the economy. By adjusting the repo rate, the RBI can either encourage banks to borrow more (by lowering the rate) or discourage borrowing (by raising the rate), thereby influencing the economic activity. For instance, a lower repo rate can stimulate economic growth by making borrowing cheaper for businesses and consumers, whereas a higher repo rate can help contain inflation by making borrowing more expensive.

Economists’ Expectations

In a survey involving 72 economists, a near-unanimous consensus emerged: the RBI is likely to keep the repo rate unchanged during this session. Only one economist out of the group suggested otherwise. Despite this unanimity, there is a prevalent belief among experts that a rate cut could happen later in the year, specifically in the final quarter. However, the precise timing remains uncertain, reflecting the complexities of economic forecasting in an unpredictable global environment.

Inflation and Economic Growth Outlook

The anticipated delay in a rate cut is largely due to inflationary pressures. Although India’s inflation rate was at 4.83% in April, it is forecasted to drop to 4.00% in the next quarter before rising again. On average, inflation is expected to hover around 4.5% for this fiscal year and the next, which is still within the RBI’s target range of 2%-6%.

On the growth front, India’s GDP is projected to grow by 6.8% this fiscal year and 6.6% the following year. The RBI’s Annual Report for 2023-24 supports this outlook, projecting a robust GDP growth rate of 7% for the current fiscal year. This optimistic forecast is underpinned by strong macroeconomic fundamentals, which include stable government policies, increasing investment, and a resilient consumer base.

Global Central Banks and RBI Strategy

The global economic landscape also influences the RBI’s decisions. Major central banks, including the U.S. Federal Reserve, have delayed interest rate cuts, reducing the urgency for the RBI to act quickly. Given India’s relatively strong growth rate and moderate inflation, there is less immediate pressure to reduce rates unless significant economic downturn risks emerge.

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Detailed Poll Results

The Reuters poll highlights that nearly half of the surveyed economists (33 out of 71) expect the RBI to implement its first rate cut in the fourth quarter of 2024, predicting a drop to 6.25%. This marks a shift from earlier forecasts in April, which anticipated a rate cut in the third quarter. By the end of 2024, the consensus is divided: 33 economists foresee the repo rate at 6.25%, 15 expect it to be 6.00%, and five predict it will drop to 5.75% or lower. The remaining 18 economists believe the rate will remain unchanged.

Conclusion

In the upcoming policy announcement, the RBI is expected to maintain the repo rate at 6.50%. The potential rate cut, likely in the last quarter of 2024, indicates the RBI’s cautious strategy in balancing inflation control with economic growth promotion. As India navigates through global economic uncertainties, the central bank’s measured approach aims to sustain growth while keeping inflation in check, reflecting its commitment to stable and sustainable economic development.

Stay tuned for the RBI’s official announcement, which will provide further insights into its monetary policy direction amidst evolving economic conditions.

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Tags: , , , Last modified: June 15, 2024