The Reserve Bank of India (RBI) announced its decision to keep its key interest rates unchanged for the seventh consecutive policy meeting on Friday. With persistent inflation above the 4 percent target, the monetary policy committee maintained the main lending rate at 6.5 percent, in line with market forecasts.
RBI governor Shaktikanta Das highlighted the importance of focusing on inflation. He stated that despite the optimistic growth outlook, monetary policy must remain actively disinflationary. He also expressed satisfaction with the declining trend in core inflation. However, he flagged concerns regarding food price volatility, which remains uncertain.
Economic outlook
The decision to keep interest rates unchanged left markets in India relatively unaffected. The Indian rupee saw a slight appreciation against the U.S. dollar. Meanwhile, bond yields remained steady at 7.10 percent. Major stock indices, including the NSE Nifty 50 and the BSE Sensex, traded flat following the announcement.
The RBI forecasts the economy to expand by 7 percent in fiscal year 2025. Strengthening rural demand, improving employment conditions, and a sustained recovery in the manufacturing and services sectors should also bolster consumer demand, supporting economic growth.
The central bank expects India’s gross domestic product to reach 7.6 percent in the year ending March 31, 2024. However, consumption, which forms nearly 60 percent of the economy, will grow just 3 percent. That is the lowest growth rate in two decades barring the pandemic period.
Monetary policy challenges
Despite the positive economic indicators, consumption growth should remain subdued, posing a challenge for policymakers. While some analysts anticipate monetary easing later in the year, the RBI’s strong growth momentum may limit the scope for significant cuts to interest rates. Governor Das expects retail inflation for 2024-25 to reach 4.5 percent.
The committee emphasized the importance of maintaining durable price stability to support a period of high growth. However, volatile food prices and risky climate shocks pose potential risks to the inflation outlook.
Read: Bank of Japan may hike interest rates as yen hits two-week high
Building reserves
In addition to maintaining interest rates, Das highlighted the central bank’s efforts to build strong forex reserves in India to provide stability during periods of economic volatility. Foreign exchange reserves reached a record high of $645.6 billion by March 29, reflecting the central bank’s commitment to strengthening India’s economic buffers.
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