Reserve Bank of India (RBI) Monetary policy: Indian stock market saw a sharp fall after the RBI kept the key benchmark rate, at which it lends to commercial banks, at 6.5 percent. The BSE Sensex tanked over 700 points and the NSE Nifty dived over 200 points after the RBI’s announcement.
In the Sensex pack, barring four stocks, PowerGrid, SBI, HCL Tech and TCS, all 26 shares were trading with heavy to moderate losses.
Private banks bore the brunt, with Axis Bank leading the decline by 2.65 percent.
Other top losers were ICICI Bank, Nestle, ITC, Kotak Bank, Maruti and Asian Paints – shedding up to 2.5 percent.
RBI’s MPC kept repo rate unchanged at 6.5 percent
The Reserve Bank kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50 percent.
Consequently, the standing deposit facility (SDF) rate remained unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent.
The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.
These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
Chandresh Vithalani, Director, Palladian Partners Advisory LLP, said, “The Reserve Bank of India’s decision to maintain the Repo rate at 6.5% for the sixth consecutive time, alongside the moderation of inflation to 5.5% from April to December 2023, serves as a cornerstone for reducing market volatility and enhancing affordability within the real estate sector.”
“This move reflects a deep understanding of the need for economic stability, which is paramount for the growth and confidence of both developers and investors. By keeping the Repo rate steady in the face of global uncertainties, the RBI has provided a predictable financial environment, allowing for more strategic planning and investment in real estate projects,” Vithalani said.
RBI’s GDP growth outlook
Domestic economic activity is strengthening. As per the first advance estimates (FAE) released by the National Statistical Office (NSO), real gross domestic product (GDP) is expected to grow by 7.3 percent, year-on-year (y-o-y) in 2023-24, underpinned by strong investment activity. On the supply side, gross value added (GVA) expanded by 6.9 percent in 2023-24, with manufacturing and services sectors as the key drivers.
The RBI said real GDP growth for 2024-25 is projected at 7 percent with Q1 at 7.2 percent; Q2 at 6.8 percent; Q3 at 7 percent; and Q4 at 6.9 percent.
Among the key drivers on demand side, household consumption is expected to improve, while prospects of fixed investment remain bright owing to upturn in the private capex cycle, improved business sentiments, healthy balance sheets of banks and corporates; and government’s continued thrust on capital expenditure. Improving outlook for global trade and rising integration in global supply chain will support net external demand. Headwinds from geopolitical tensions, volatility in international financial markets and geoeconomic fragmentation, however, pose risks to the outlook.
The central bank said that going forward, the inflation trajectory would be shaped by the evolving food inflation outlook. Rabi sowing has surpassed last year’s level.
“The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events. Effective supply side responses may keep food price pressures under check. The continuing pass-through of monetary policy actions and stance is keeping core inflation muted,” it said.
Crude oil prices, however, remain volatile, it added. Manufacturing firms covered in the Reserve Bank’s enterprise surveys expect some softening in the growth of input costs and selling prices in Q4:2023-24, while services and infrastructure firms expect higher input cost pressures and growth in selling prices, the central bank’s statement said.
Taking into account these factors, CPI inflation is projected at 5.4 per cent for 2023-24 with Q4 at 5.0 per cent. Assuming a normal monsoon next year, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 5.0 per cent; Q2 at 4.0 per cent; Q3 at 4.6 per cent; and Q4 at 4.7 per cent. The risks are evenly balanced, the RBI said.
