RBI MPC update: Central bank keeps repo rate unchanged at 5.25%, says Governor Sanjay Malhotra

Amid continued tensions in West Asia and fears that a weak monsoon could lift food prices in the months ahead, Reserve Bank of India (RBI) Governor Sanjay Malhotra said that the central bank has kept the repo rate unchanged at 5.25%. The Standing Deposit Facility (SDF) rate and Marginal Standing Facility (MSF) rate and the bank rate were also kept unchanged at 5% and 5.25%, respectively.

The RBI boss said the MPC unanimously decided to maintain a neutral stance to be able to keep a close watch on upcoming economic developments. "MPC unanimously decided in favour of status quo on policy interest rate with neutral stance," Governor Malhotra said.

The RBI’s monetary policy committee met this week, with the repo rate widely expected to remain unchanged. Economists expected the MPC to stay cautious as it weighs global oil prices, weather-related risks and earlier pressure on the rupee against the US dollar.

At the same time, strong FCNR (B), or foreign currency non-resident, deposit flows are expected to give the central bank some comfort by helping strengthen foreign exchange reserves. In this backdrop, the MPC may maintain the status quo while pushing any possibility of a rate hike to a later date. In the June MPC meeting, the repo rate was left unchanged at 5.25 per cent, while the central bank announced several measures to boost foreign institutional investor flows into the country.

"Present growth-inflation dynamics point towards risks to growth with a manageable inflation trajectory in the immediate future. This coupled with elevated global uncertainties, may result in MPC not considering the rate hike option in a hurry," reckoned Mandar Pitale, head, financial markets, SBM Bank (India) Ltd. He said the MPC is likely to give cautionary guidance, with global oil prices and the monsoon remaining key monitorables.

Santanu Sengupta, chief India economist at Goldman Sachs, also expects the MPC to leave the repo rate unchanged and retain the neutral stance. "We expect the MPC to retain a cautious tone on the outlook, particularly around El Niño-related weather risks and the still-elevated uncertainty from Middle East geopolitical tensions," said Sengupta.

Earlier this year, the RBI announced a special window for banks to raise foreign currency FCNR(B) deposits and swap them at concessional rates. According to the latest data, a cumulative $40.81 billion has been raised through FCNR (B) deposits, overseas foreign currency borrowings and external commercial borrowings.

Sengupta said that since the rupee had stabilised after RBI measures, there was limited need for the MPC to turn more hawkish in the near term. With crude oil prices below $95 per barrel, the RBI may revise its inflation forecast "modestly lower", he added.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said, "The MPC may keep rates unchanged. But, the current backdrop has made soft language costlier: oil volatility, rupee pressure, external-flow caution and higher inflation projections make an explicitly dovish message less likely."