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RBI Keeps Repo Rate Unchanged: October 2024 Monetary Policy Committee (MPC) Review

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Synopsis:

The RBI decided to keep the repo rate at 6.5% in October 2024, with a shift to a neutral stance. Inflation is expected to rise in the short term, but GDP growth remains strong.

RBI Monetary Policy October 2024: Key Highlights

The Reserve Bank of India (RBI), in its October 2024 monetary policy review, decided to keep the repo rate steady at 6.5%. This decision reflects the central bank’s focus on managing inflation while supporting economic growth. Below are the major takeaways from the meeting:

Monetary Stance Shift:

The RBI shifted its policy stance to "neutral" from the previous "withdrawal of accommodation," signaling a balanced approach to future rate decisions.

Inflation Outlook:

The RBI projects that headline inflation will reverse its recent moderation, with pressures expected to increase in September due to adverse base effects. Food inflation may ease in the later part of the fiscal year.

GDP Growth Projections:

The real GDP growth for FY 2024-25 is projected at 7.2%, with Q2 at 7%, Q3 at 7.4%, and Q4 at 7.4%. Growth in Q1 FY 2025-26 is estimated at 7.3%.

Consumer Price Index (CPI) Forecast:

CPI inflation for FY 2024-25 is projected at 4.5%, with a sharp rise expected in September due to base effects.

System Liquidity:

System liquidity remained in surplus in recent months, leading to lower yields on short-term instruments like 3-month T-bills and commercial papers.

Global Economic Trends:

World trade is improving, supported by softening energy prices, which have contributed to reducing global inflationary pressures.

Key Announcements from RBI’s Policy Meeting

UPI Payment Limit Hike:

In a move to enhance digital payments, the RBI increased the per-transaction limit for UPI 123 Pay from ₹5,000 to ₹10,000.

Investment and Demand Trends:

Rural demand is trending upward, while urban demand remains strong. Investment activity is buoyant, supported by the government's capital expenditure program.

Current Account Deficit:

India’s current account deficit widened to 1.1% of GDP in Q1 FY 2024-25, reflecting global trade dynamics.

Indian Rupee Stability:

The Indian rupee remains one of the least volatile currencies among emerging markets, reflecting the country's robust macroeconomic fundamentals.

Growth and Inflation Outlook

The RBI emphasized that while the GDP growth outlook remains optimistic, inflationary risks are heightened in the near term. The central bank will closely monitor the inflation trajectory, especially concerning food prices, and act accordingly to ensure price stability.

What Does the "Neutral" Stance Mean?

When the Reserve Bank of India (RBI) adopts a neutral stance, it implies that the central bank is taking a balanced and flexible approach to future monetary policy decisions. Unlike a "hawkish" stance (which focuses on controlling inflation) or a "dovish" stance (which promotes economic growth through lower interest rates), a neutral stance means that the RBI is open to either raising or lowering interest rates based on evolving economic conditions. This flexibility allows the central bank to react to changing scenarios like inflation pressures or economic growth without being biased towards either raising or lowering rates.

For normal people, a neutral stance means that interest rates on loans and deposits may not change immediately. However, depending on future inflation trends or economic growth, the RBI could adjust rates, which could impact things like:

Loan EMIs:  If the RBI increases rates in the future, borrowing costs for home loans, car loans, and personal loans could go up, leading to higher EMIs.

Savings:  Conversely, if interest rates are raised, savings accounts, fixed deposits, and other investments might offer better returns.

What Are SDF and MSF?

Standing Deposit Facility (SDF):

The SDF is a tool used by the RBI to absorb excess liquidity (money) from the banking system. This facility allows banks to deposit their excess reserves with the RBI without needing collateral (like government securities). It acts as a floor for the interest rates in the economy, as the RBI offers interest on these deposits to banks.

Impact on People:

The SDF indirectly influences interest rates in the economy. If the RBI uses this facility to absorb more liquidity, it could reduce the money supply in the market, making it costlier for banks to borrow funds. This might lead banks to increase interest rates on loans, making it more expensive for consumers to borrow money. Conversely, if less liquidity is absorbed, borrowing could become cheaper.

Marginal Standing Facility (MSF):

The MSF is a facility that allows banks to borrow money from the RBI when they face a shortage of funds, but at a higher interest rate than the regular borrowing rate (repo rate). Banks usually use this facility in emergencies or when they need immediate liquidity.

Impact on People:

The MSF helps ensure that banks always have access to funds, preventing liquidity crises. For consumers, this means that banks can maintain their day-to-day operations, including providing loans and keeping interest rates. However, because the MSF rate is higher than the repo rate if banks frequently use this facility, they may pass on the higher borrowing costs to consumers through increased loan rates. This could make personal, home, and business loans more expensive.

In essence, both SDF and MSF help regulate liquidity in the banking system and ensure financial stability, indirectly influencing interest rates and the availability of credit to consumers.

Conclusion

The October 2024 policy decision reflects the RBI’s focus on maintaining a balance between inflation control and economic growth. With inflation expected to rise in the near term and the economy projected to grow steadily, the central bank has chosen to keep the repo rate unchanged at 6.5%. The enhanced UPI payment limit and other measures indicate the RBI's continued focus on boosting digital transactions and economic resilience.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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Frequently Asked Questions

What is the repo rate decided in the RBIs October 2024 monetary policy review?

Answer Field

The repo rate has been kept unchanged at 6.5%.

What is the projected GDP growth for FY 2024-25?

Answer Field

The RBI has projected real GDP growth of 7.2% for FY 2024-25.

How does the inflation outlook look for the coming months?

Answer Field

Headline inflation is expected to rise in September due to base effects, with food inflation easing later in the fiscal year.

What changes have been made to the UPI payment limits?

Answer Field

The RBI has increased the per-transaction limit for UPI 123 Pay from ₹5,000 to ₹10,000.

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