India Holds Key Interest Rates As Expected; Raises Growth Outlook

India’s central bank kept its key interest rates unchanged for the eighth straight session on Thursday and pledged to maintain the disinflationary stance until inflation aligns with the target on a durable basis amid faster economic growth.

The Monetary Policy Committee of the Reserve Bank of India led by Governor Shaktikanta Das, voted 4-2 to keep the policy repo rate at 6.50 percent.

The bank has raised the repo rate cumulatively by 250 basis points in the current tightening cycle that began in May 2022. The rate has been at 6.50 percent since February 2023.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Policymaker Ashima Goyal joined Jayanth Varma in seeking a quarter-point reduction in the policy rates. They also voted for a change in the monetary policy stance to neutral.

The MPC observed that the domestic growth-inflation balance has moved favorably since its last meeting in April 2024.

The bank expects inflation to fall temporarily below the target in the September quarter due to favorable base effect, before reversing subsequently.

“The MPC will remain resolute in its commitment to aligning inflation to the 4 percent target on a durable basis,” the bank said.

The central bank raised its growth outlook for 2024-25 to 7.2 percent from 7.0 percent.

“When the projected GDP growth of 7.2 per cent for 2024-25 materialises, it will be the fourth consecutive year with growth at or above 7 per cent,” Das said.

The governor said headline consumer price index continues to be on a disinflationary trajectory. However, repeated food price shocks slowed down the overall disinflation process.

That said, the projection for CPI inflation for 2024-25 was maintained at 4.5 percent.

At 4.8 percent, consumer price inflation remains at the upper half of the 2-6 percent target range.

Headline inflation could reach the central bank’s target of 4 percent by July, supporting the view that the RBI will begin policy easing in August, economists at Capital Economics said.

ING economist Robert Carnell said the RBI is unlikely to cut until the fourth quarter of this year.

“But we could move this up to the third quarter if the Federal Reserve begins to ease before then, as this would also take some pressure off the INR,” said Carnell.

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