MPC to Hold Rates in April Policy

The six member rate setting panel (MPC) headed by the RBI governor Shaktikanta Das has started its three-day deliberations on Wednesday (April 3) and the decision on rates would be announced on Friday, April 5. This would be the first monetary policy for FY25.

The RBI hiked policy rates by 250 basis points between May 2022 and February 2023, since then it has kept the repo rate unchanged at 6.5 per cent. The repo rate is the rate of interest at which RBI lends to other banks.

Moreover, banks have transmitted less than half of the 250 basis points increase to outstanding bank loans, a case of worry for the RBI. A status quo in repo rate means that all external benchmark lending rates (EBLR) that are linked to the repo rate will remain unchanged providing relief to borrowers. However, lenders may raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the entire monetary transmission has not happened.

India’s retail inflation (CPI) for the last three months has been on the downward trajectory from 5.7 per cent in December 23 to 5.1 per cent in January 24 and similar level in Feb 24. However, there remain some upside risks given the adverse weather conditions or how pronounced the impact of El Nino (83 per cent chance of occurrence in April-June 24) will be in coming months and if it will lead to below normal rainfall. On the other hand, the growth momentum in the economy is strong and FY 24 is likely to register GDP growth of 7.6 per cent, much ahead of the initial estimates thus ruling out the need of a rate cut.

“The RBI is unlikely to pivot at the current juncture, given the resilience in the domestic economy. The likelihood of any rate cuts has been pushed forward to H2FY25. We expect two rate cuts this year of 25-50 bps with the first one likely in August 2024, which however is contingent on the evolving inflation scenario,” said economist at
the Bank of Baroda.

The US Fed has hinted at 3 rate cuts in CY24 with the first one expected in June 24. Bank of England and ECB too is expected to follow suit with rate cuts this year. On the other hand, BoJ made a historic shift and has hiked rates (0.1 per cent from 0 per cent) for the first time in over 17 years.