The MPC was of the opinion that there are considerable risks to the baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the West Asia conflict, magnitude of its spillover effects and the pace of restoration of supply chains
Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday held the benchmark repo rate at 5.25 per cent with a neutral but noticeably more cautious stance.
Acknowledging the risks to the growth-inflation outlook arising from the ongoing West Asia crisis, the RBI downgraded its FY27 real GDP growth projection to 6.6 per cent (down from 6.9 per cent) and raised its FY27 inflation outlook to 5.1 per cent (up from 4.6 per cent).
The MPC was of the opinion that there are considerable risks to the baseline assessment of inflation and growth due to the uncertainty about the duration and intensity of the West Asia conflict, magnitude of its spillover effects and the pace of restoration of supply chains. Additionally, the food outlook remains uncertain on account of the sub-normal south-west monsoon forecast and El Niño.
Responding to a question by DC at the Monetary policy press conference whether the sharp 50 basis points revision in inflation forecast with upside risks signals a looming rate hike in the next policy meeting, the RBI governor Sanjay Malhotra said, “It is (inflation) more adverse than it was previously. We will have to see if inflation is actually getting generalised. If inflation increase is one time then you have to look through but if it is getting generalised, persistent or built into expectations then we will act. For that we have to wait and watch”
A status quo on rates brings real relief, sparing existing homeowners from EMI hikes and giving new buyers a secure window to lock in at the current mortgage rates. On the other hand deposit rates are likely to remain broadly supported.
For depositors, select private banks are offering up to 7.35 per cent on specific tenures, while several mid-sized lenders continue to offer rates above 7 per cent. Senior citizens can typically earn an additional 25 to 50 basis points over these rates. With inflation projected to rise through the year and peak at 5.9 per cent in the third quarter, preserving real returns remains an important consideration.
Says Adhil Shetty, chief executive officer at Bankbazaar, “Rather than attempting to time future rate movements, depositors may benefit from spreading investments across one, two and three-year tenures. A laddered approach helps lock in current yields while retaining flexibility to reinvest if rates move higher or liquidity needs change. In the current environment, the RBI's message is not that rates are headed sharply lower, but that inflation risks have increased sufficiently to warrant caution. That should encourage savers to review their deposit strategy sooner rather than later. According to Shetty, borrowers on older benchmarks such as Marginal Cost based lending rate should review whether their loans remain competitive, while those paying materially higher rates than prevailing market levels may benefit from evaluating refinancing options. “In a stable rate environment, directing surplus cash towards principal reduction can often generate greater long-term savings than waiting for incremental changes in policy rates," added Shetty.
Along with a rate pause, a highly coordinated fiscal and monetary strategy was deployed by the RBI to attract foreign capital inflows, stabilize the Indian rupee which has fallen by 10 per cent year on year in the past 12 months, and bridge the Balance of Payments deficit. The net FPI equity outflows this fiscal year up to June 2 stood at $13.7 billion adding pressure on the rupee.
The measures included expanding long-term G-secs under the Fully Accessible Route, removing Foreign Portfolio Investment limits under the General Route, raising NRI stock market investment limits, and introducing concessional forex swaps for PSUs and authorised dealer banks. The central bank also restored the export realisation period to nine months.
