India’s central bank holds key rates, raises growth outlook

The Reserve Bank of India (RBI) kept its key interest rate unchanged on Friday in a widely expected move, saying robust economic growth will give it space to focus on bringing down inflation towards its medium-term target of 4%.

The central bank raised its economic growth outlook for the current year but kept its outlook on inflation unchanged, though it warned of persistent price pressures on food.

Governor Shaktikanta Das said the RBI wants to ensure that inflation aligns with its target on a sustained basis.

The Monetary Policy Committee (MPC), which consists of three RBI and three external members, kept the repo rate unchanged at 6.50% for an eighth straight policy meeting.

Four out of six MPC members voted in favour of the repo rate decision. JR Varma and Ashima Goyal, both external members of the committee, voted for a 25 basis point cut in rates.

India’s economy, Asia’s third-largest, grew faster than expected in the January-March quarter but a surprising outcome in the recently concluded national elections rattled markets. A weakened mandate for the ruling Bharatiya Janata Party-led National Democratic Alliance has raised concerns about a slower pace of fiscal consolidation alongside higher welfare spending.

All but one of 72 economists in a Reuters poll had expected the MPC to hold the repo rate steady at 6.50%. Most economists believe the 6.50% rate is the peak of the current cycle and are not expecting any move until the October-December quarter.

The committee decided by a majority of four out of six votes to retain the ‘withdrawal of accommodation’ stance, with Varma and Goyal voting for a change in stance to ‘neutral’.

Until April, only one of six committee members had voted against the status quo in rates and policy stance.

Investors have been adding to bets the US Federal Reserve could ease rates in September, following similar moves by the European Central Bank and Bank of Canada this week.

The MPC last changed rates in February 2023, when the policy rate was raised to 6.5%.

India’s benchmark 10-year bond yield rose 2 basis points to 7.02% after the policy decision while the rupee was little changed.

The MPC raised its full-year GDP growth forecast to 7.2% from 7% earlier and sees inflation averaging 4.5% in the fiscal year to March 2025.

India’s economy remains resilient, Das said, adding he expects manufacturing activity to gain ground and consumption recover. Rural demand is also being aided by a pick-up in farm activity.

Investment activity is likely to stay on track, with high capacity utilisation, balance sheets of banks and corporates are healthy and the government will keep up infrastructure spending, the MPC said in its written outlook.

GDP data last week showed the economy expanded at a faster-than-expected pace of 7.8% in the March quarter, taking full-year growth to 8.2%.

Annual retail inflation eased slightly to 4.83% in April from 4.85% in March but was still well above the MPC’s target.

Swap markets are signalling an extended pause in interest rates until the last quarter of the calendar year.

“The mix of strong growth and above-target inflation does not make a case for a shift to a less-restrictive policy setting as yet, validating our view that rate easing is not on the cards this year,” said Radhika Rao, senior economist at DBS Bank.

“Political developments are not expected to sway the monetary policy direction or outlook.”

With a lower trade deficit, robust services export growth and strong remittances, the current account deficit (CAD) is expected to have moderated in the January - March quarter of 2023-24, RBI Governor Shaktikanta Das said on Friday.

FX at historical high: India’s foreign exchange (FX) reserves reached a historical high of $651.5 billion as of May 31. India’s external sector remains resilient and overall, we remain confident of meeting our external financing requirements comfortably, Das said at a press conference after the monetary policy meeting.

India, with an expected 15.2 per cent share in world remittances in 2024, continues to be the largest recipient of remittances globally. Overall, the current account deficit for 2024-25 is expected to remain well within its sustainable level, he added.

The RBI chief said services exports were predominantly driven by software exports, other business services and travel exports. The phenomenal rise of global capability centres (GCC) in India has provided a significant boost to India’s software and business services exports, he pointed out.

He observed that on the external financing side, foreign portfolio investment (FPI) flows surged in 2023-24 with net FPI inflows at $ 41.6 billion. Since the beginning of 2024-25, however, foreign portfolio investors have turned net sellers in the domestic market with net outflows of $ 5.0 billion (till June 5).

In 2023, India retained its position as the most attractive destination for greenfield foreign direct investment (FDI) in Asia Pacific. Gross FDI remained robust in 2023-24, but net FDI moderated. External commercial borrowings (ECBs) and non-resident deposits recorded higher net inflows as compared with the previous year. The amount of ECB agreements also grew markedly during the year, he added.