RBI keeps policy repo rate unchanged at 6.50%

Accordingly, RBI said, the standing deposit facility (SDF) rate will remain unchanged at 6.25 per cent and the marginal standing facility (MSF) rate and the Bank Rate unchanged at 6.75 per cent.

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

These decisions, RBI said,  are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

RBI noted that the global economic activity continued to remain resilient amidst the persistence of inflation at elevated levels, turmoil in the banking system in some advanced economies (AEs), tight financial conditions and lingering geopolitical hostilities. Recent financial stability concerns have triggered risk aversion, flights to safety and heightened financial market volatility. 

Sovereign bond yields fell steeply in March on safe haven demand, reversing the sharp increase in February over aggressive monetary stances and communication. Equity markets have declined since the last MPC meeting and the US dollar has pared its gains. Weakening external demand, spillovers from the banking crisis in some AEs, volatile capital flows and debt distress in certain vulnerable economies weigh on growth prospects, says the RBI release.

On the domestic front, the second advance estimates (SAE) released by the National Statistics Office (NSO) on 28 February 2023 placed India’s real gross domestic product (GDP) growth at 7 per cent in 2022-23. Private consumption and public investment were the major drivers of growth.

Economic activity remained resilient in Q4. Rabi foodgrain production is expected to increase by 6.2 per cent in 2022-23. The index of industrial production (IIP) expanded by 5.2 per cent in January while the output of eight core industries rose even faster by 8.9 per cent in January and 6.0 per cent in February, indicative of the strength of industrial activity. In the services sector, domestic air passenger traffic, port freight traffic, e-way bills and toll collections posted healthy growth in Q4, while railway freight traffic registered a modest growth. Purchasing managers’ indices (PMIs) pointed towards sustained expansion in both manufacturing and services in March.

Amongst urban demand indicators, passenger vehicle sales recorded strong growth in February while consumer durables contracted in January. Among rural demand indicators, tractor and two-wheeler sales were robust in February. As regards investment activity, growth in steel consumption and cement output accelerated in February. Merchandise exports and non-oil non-gold imports contracted in February while the strong growth in services exports continued.

CPI headline inflation rose from 5.7 per cent in December 2022 to 6.4 per cent in February 2023 on the back of higher inflation in cereals, milk and fruits and slower deflation in vegetables prices. Fuel inflation remained elevated, though some softening was witnessed in February due to a fall in kerosene (PDS) prices and favourable base effects. Core inflation (ie CPI excluding food and fuel) remained elevated and was above 6 per cent in January-February. The moderation observed in inflation in clothing and footwear, and transportation and communication was largely offset by a pick-up in inflation in personal care and effects and housing, the release noted.

During 2022-23, money supply (M3) expanded by 9.0 per cent and non-food bank credit rose by 15.4 per cent. India’s foreign exchange reserves were placed at $578.4 billion as on 31 March 2023.

The average daily absorption under the LAF moderated to Rs1.4 lakh crore during February-March from an average of Rs1.6 lakh crore in December-January.

RBI said the inflation trajectory for 2023-24 would be shaped by both domestic and global factors. Taking into account the emerging trends in production and supply and assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon, RBI expects CPI inflation to be around 5.2 per cent for 2023-24, with Q1 at 5.1 per cent, Q2 at 5.4 per cent, Q3 at 5.4 per cent and Q4 at 5.2 per cent.