RBI's 2024 Policy: Central Bank Keeps Repo Rate Steady at 6.50%

Introduction

On the final day of the RBI Monetary Policy Committee’s (MPC) meeting, the Governor of the Reserve Bank of India announced a crucial decision: the central bank would keep the repo rate at 6.50% percent for the current year. This was a statement that was much anticipated by market analysts and the economic sectors and signaled a dramatic change in the financial situation. Imagine only that the event occurred the first day of trading, and when the news came out, the directories of stock exchanges increased, and stock indices rose. This has given a positive response regarding investor confidence and the monetary policy being maintained by the RBI at present and it has also underlined the kind of stability and predictability to the environment, that such a decision carries.

Understanding the Repo Rate

The repo rate refers to the Central Banking Rate at which the Reserve Bank of India provides funds to commercial banks. In the banking sector, this arrangement is known as a “Repurchase Agreement.” Under this mechanism, banks sell securities to the RBI with an understanding to repurchase them later at a predetermined rate and after a specified duration.

If the inflation rate increases, the RBI hikes the repo rate to increase the cost of borrowing, which leads to a reduction in the circulation of money and, thus, helps control inflation. On the other hand, during a recessionary situation, the RBI lowers the repo rate to make borrowing cheaper, so that banks will lend more, thereby fostering economic activity. Therefore, the repo rate bears the responsibility of maintaining price levels and ensuring economic stability.

Historical Context and Recent Decisions

The RBI has gradually raised the repo rate by 250 bps in a step-up process starting in April 2022 to touch the current high of 6.50%. The debt ceiling will be raised by 50% in February 2023 to address inflation. However, inflation has started stabilizing in some economies and this has informed policymakers to keep the rate at this level due to ongoing inflationary pressures and uncertainties in the global economy. Also, the US Federal Reserve maintained its rates steady, which contributed to the policy rates recommended by the RBI.

Key Outcomes of the RBI MPC Meeting

The RBI MPC meeting encompassed several crucial economic indicators and decisions:

• Inflation Trends: Headline inflation has shown a declining trend, dropping from 5.1% in February 2024 to 4.8% in April 2024. However, food inflation remains elevated, particularly for vegetables, cereals, pulses, and spices.

• Fuel Prices: There has been a decline in fuel prices in March and April, which contributed to a reduction in LPG prices, offering some relief to consumers.

• Core Inflation: Excluding food and fuel, core inflation fell to 3.2% in April, marking one of the lowest levels in recent times.

• Equity Markets: Stock markets have seen significant gains, with indices in both advanced and emerging markets reaching new highs.

• Bond Yields and Currency Volatility: Bond yields and the US dollar have exhibited volatility, particularly impacting emerging markets like India.

• Gold Prices: Gold prices in India have surged to new heights, reflecting broader economic uncertainties and investor behavior.

• GDP Growth: In the fourth quarter of FY24, GDP growth decreased to 7.8%, compared to 8.6% in the previous quarter.The GDP growth for FY24 reached 8.2%, whereas the Gross Value Added (GVA) increased by 6.3% in the fourth quarter and 7.2% over the entire fiscal year.

• Inflation Forecast: The RBI projects Consumer Price Index (CPI) inflation to be around 4.5% for FY25, aligning with its target of 4% ± 2%.

• Current Account Deficit (CAD): The CAD has moderated in Q4 FY24 and is expected to remain manageable in FY25, bolstered by strong export growth and significant remittance inflows, with India leading globally in remittance receipts.

• Foreign Portfolio Investment (FPI): FPIs surged to US$41.6 billion in FY24 but saw a withdrawal of around US$5 billion in early FY25, influenced by rising yields in Western economies and domestic political developments.

• Foreign Exchange Reserves: India's foreign exchange reserves hit a record high of US$651.5 billion on 31, May 2024, showcasing robust external financial health.

Implications for Investors

The stock market's reaction to the RBI's decision to keep the repo rate unchanged has been notably positive. Investors are showing increased confidence, reflected in the substantial gains in key indices. The BSE Sensex surged by around 1,000 points within the first two hours of trading, and the Nifty 50 climbed more than 300 points, nearing pre-election levels. This buoyant market response underscores the perceived stability and continued economic growth, partly driven by the RBI's monetary policy stance.

Conclusion

The RBI’s choice to keep the repo rate steady at 6.50% reflects a prudent strategy in light of persistent economic uncertainties. With inflation gradually easing and external economic conditions stabilizing, this policy aims to sustain economic growth while keeping inflation within targeted limits. The positive response from financial markets highlights investor confidence in the central bank’s measures and the broader economic outlook for India in 2024 and beyond.

By keeping a steady hand on the monetary tiller, the RBI aims to navigate the complex economic landscape, balancing growth and inflation control, which is crucial for sustaining long-term economic stability and investor confidence.

Frequently Asked Questions

1. How can I stay updated on the latest news and updates regarding the stock market?

To stay informed about the latest news and updates on stocks, you can subscribe to newsletters, follow financial news websites, or use financial apps like "Enrich Money" that provide real-time updates, analysis, and insights on stock market trends and developments.

2. Why did the RBI keep the repo rate unchanged at 6.50% in 2024?

The RBI maintained the repo rate at 6.50% to control inflation and ensure economic stability amidst global uncertainties.

3. How does the repo rate affect inflation?

When the RBI raises the repo rate, it reduces money circulation by making borrowing more expensive, which helps control inflation.

4. What impact did the RBI’s decision have on the stock market?

The decision boosted investor confidence, leading to significant gains in key indices like the BSE Sensex and Nifty 50.

5. What are some key economic indicators discussed in the RBI MPC meeting?

The meeting covered trends in inflation, GDP growth, fuel prices, and foreign exchange reserves, among other indicators.