On the last day of the RBI Monetary Policy Committee’s meeting, the RBI governor announced the central bank’s take on keeping the repo rate unchanged. It was quite expected that the rate would remain unchanged and thus, the stock market appreciated the decision and going up since the market opened.
The repo rate is the rate at which the central bank lends money to the commercial banks. In simple words, this is the cost that commercial bank pays to RBI for borrowing funds, then commercial banks add their charges on the repo rate of RBI and that is what the general people borrowing funds pay to the commercial banks.
The central bank increased the rate by around 250 basis points between April 2022 and February 2023, when it started raising the repo rate to curb inflation. During the MPC meeting in February 2023, the repo rate was decided to be 6.5% and the central bank has maintained the same rate until now as inflation may have eased but it is still there and the global economy is in turmoil. The decision to maintain the rates at this level also has to do with FED US keeping rates unchanged.
Key Outcomes of RBI MPC Meeting
Apart from the repo rate, the key factors discussed in the monetary policy meeting are below –
- Headline inflation has been cooling down since February 2024. While it was 5.1% in February, in April 2024, it stood at 4.8%. However, the inflation in food products remains high especially the prices of vegetables, cereals, pulses, and spices remain at a higher level.
- The prices of fuel decreased during March and April, which helped in reducing the prices of LPG in the country.
- Core inflation excluding food and fuel decreased further to 3.2% in April, which has been one of the lowest.
- Equity markets have reached new highs in both advanced and emerging sectors.
- Bond yields and the US Dollar remained volatile, especially in emerging markets like India.
- Gold prices have touched new highs in the country.
- Coming to the GDP, in the fourth quarter it grew by 7.8% down from 8.6% in Q3FY24. The overall GDP growth recorded in FY24 stood at 8.2% while GVA surged by 6.3% in Q4FY24 and 7.2% in the financial year 2024.
- RBI MPC expects the Consumer Price India (CPI) inflation to be around 4.5% during FY25. This is within the range of the RBI inflation target which is 4% +/- 2.
- The current account deficit (CAD) has moderated in the last quarter of FY24 and it is expected to be manageable in FY25. The robust growth in exports and significant remittance growth benefited the country in maintaining a healthy level of CAD. India has been the largest recipient of remittance in the world with a share of 15.2% globally.
- The Foreign Portfolio Investment (FPI) increased in FY24 and touched US$ 41.6 billion, however, at the beginning of FY25, FPIs have withdrawn around US$ 5 billion till June 5, 2024. The shift in the dynamics can be attributed to the rising yields in the West and the political scenario in the country.
- Foreign Exchange Reserve of India touched new heights on 31 May 2024 with US$651.5 billion. This also indicates the strong growth in external policies and affairs.
What it means for the investors?
As this is the first RBI MPC meeting after the election, the effect on the stock market can be felt immensely. With the favorable outcomes of the meeting, the investors are pouring money into the market, as the rates are unchanged. The BSE Sensex gained around 1000 points in the first two hours of the market session today while Nifty 50 gained more than 300 points. Both the broad market equity indices are trading close to their pre-election levels. This indicates the continuation of the upswing in the market and RBI monetary policy 2024 played one of the key roles in the same.
Source: Forbes, Times of India, RBI Governor Speech, RBI MPC Details
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