India’s RBI keeps lending rate unchanged at 6.5 pc owing to rising inflation, industry reacts with positivity

The Reserve Bank of India (RBI) on Thursday kept its key lending rate unchanged at 6.50 percent as expected, eliciting some positive reactions from the business sector. 

The RBI said that headline inflation, after reaching a low of 4.3 percent in May 2023, rose in June and is expected to surge during July and August, led by vegetable prices. Photo courtesy: Wikipedia

The monetary policy committee (MPC) of the RBI, which has three members from the central bank and three external members, kept the repo rate  unchanged for the third consecutive time. 

"The Monetary Policy Committee (MPC) met on August 8, 9, and 10. After detailed deliberation on all relevant aspects, the MPC decided unanimously to keep the policy repo rate unchanged at 6.5%," said RBI Governor Shaktikanta Das.

Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25 percent, and the Marginal Standing Facility (MSF) rate and the Bank rate stand at 6.75 percent.

The RBI Governor said that the MPC decided by a majority of five out of six members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

Explaining the rationale behind the MPC's decisions, the Governor said that headline inflation, after reaching a low of 4.3 percent in May 2023, rose in June and is expected to surge during July and August, led by vegetable prices.

The RBI is tasked with keeping retail inflation in the range of 2–6 percent and maintaining price stability.

"The cumulative rate hike of 250 basis points undertaken by the MPC so far is working its way into the economy. Nevertheless, domestic economic activity is holding up well and is likely to retain its momentum despite weak external demand," Das said.

The Governor said that the Indian economy is exuding enhanced strength and stability despite the massive shocks to the global economy in recent years.

"Our economy has continued to grow at a reasonable pace, becoming the fifth largest economy in the world and contributing around 15 percent to global growth," he said while making the monetary policy statement.

He said that India is uniquely placed to benefit from transformational shifts in the global economy in the wake of geopolitical realignments and technological innovations.

"With a large economy marching ahead with vast domestic demand, untapped resources, and demographic advantages, India can become a new growth engine for the world," he said.

Industry Reactions: 

Girish Kousgi, MD and CEO at PNB Housing Finance, said, "RBI's decision to keep the repo rates unchanged at 6.5% for the third time in a row, is positive news for the real estate industry. The home buyer sentiment has been strong thus far in 2023, and the stability in rates will help keep up this momentum. Factors like attractive government incentives, increased urbanization, rising disposable income and post-pandemic pent-up demand have resulted in a rise in the appetite for housing units in India."

"Looking ahead, the housing finance industry will benefit from this buoyancy and continue to capitalize on this opportunity by offering a variety of home loan products at competitive rates to potential homebuyers," he said.

Sanjay Palve, Senior Managing Director, Essar Capital Ltd., said: “Today's RBI monetary policy decision to maintain policy rates and stance, aligns with our expectations in this dynamic economic environment. The MPC’s focus on managing inflation while nurturing growth underscores the delicate balance needed for sustainable economic progress."

"The focus on ‘withdrawal of accommodation’ stance is expected to continue with volatile inflationary pressure due to the anticipation of a sub-normal to normal monsoon. Even though inflation remains a challenge, RBI remains focused to achieve an inflation target of 4 per cent, and they will not look at any drastic change, since India continues to outperform other countries in terms of consumption, especially as we stand at the beginning of the festive season,” he said 

Dhiraj Relli, MD & CEO, HDFC Securities, said: "There was unanimity in the market about no changes in the rates at the RBI MPC meet on Aug 10 and the markets did not get surprised at the outcome. The MPC continued with the ‘withdrawal of accommodation’ stance (with 5:1 majority).

"Hawkish pause was widely expected with inflation assuming the center stage given the recent uptick in food prices, as seen from sharp increase in RBI’s inflation forecast. from 5.1% to 5.4% for FY24. India’s economic activity has continued to demonstrate resilience and RBI retained its GDP forecast at 6.5% in FY24."

"Given the excess liquidity in the system, especially from withdrawal of Rs 2000 notes; RBI directed scheduled banks to maintain an incremental CRR of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023 to absorb the surplus liquidity.

"Post this announcement, Bank Nifty slipped into weakness as this announcement is negative for Banks. Higher forecast of inflation also doused hopes of an early beginning of rate cut impacting Bank stocks."

He said the RBI is expected to maintain close vigil on the evolving inflation outlook and is focused to keep inflation expectations firmly anchored at its primary target of 4 percent, though the task seems daunting.

"We think the central bank seems to have fewer concerns about growth rather than uncertainty around the inflation outlook. We expect rate cut perhaps in Q1FY25 but that would be data dependent," he said.

 "Banks may not help the Nifty to continue to rise and focus could shift to other sectors in the near term,” he added.