Extended Pause

Announcing the outcome of the 6-member Monetary Policy Committee (MPC) meet on 8th December 2023, RBI Governor Shaktikanta Das said that the central bank has decided to keep the repo rates unchanged at 6.5%. The standing deposit facility rate and the marginal standing facility rate were left unchanged at 6.25% and 6.75%, respectively. The MPC also decided to remain focused on withdrawal of accommodation with an aim to align inflation to the target on a durable basis while supporting growth. This is the fifth consecutive time of the ongoing fiscal when RBI has decided to maintain status quo in its key interest rates. The persistent deficit conditions in October and November compelled banks to utilize the Marginal Standing Facility (MSF) and the Systemic Lending Facility (SDF), said RBI Governor Das.

The December 2023 MPC meet was in the backdrop of a fragile global economy due to elevated debt levels and lingering geopolitical tensions as well as extreme weather conditions. Governor Shaktikanta Das said that the long-awaited normality still eludes the global economy, although emerging economies have remained resilient. He added that the years 2020 to 2023 will perhaps go down in history as the period of ‘Great Volatility’. Headline inflation has remained above target in many countries and major central bankers have kept rates on hold while refraining from forward guidance in view of the prevailing uncertainties and volatile financial markets. There has been broad-based easing in core inflation, which is indicative of successful disinflation through monetary policy actions. However, inflation outlook could be considerably influenced by uncertain food prices. Inflation remains sticky and volatile, hence the need to keep an eye on the same remains, he added.

We have now reached a stage when every action has to be thought through even more carefully to ensure overall macroeconomic and financial stability, more so because the conditions ahead could be fickle. We have to remain vigilant and ready to act as per the evolving outlook. India is better placed to withstand the uncertainties compared to many other countries.

- RBI Governor Shaktikanta Das

GDP growth for 2023-24 increased to 7% from 6.5%.
CPI Inflation for 2023-24 retained at 5.4%.        

Observations on Economic Activity

• Economic activity in India continues to be resilient: India maintained its position as the world's fastest-growing major economy, with a GDP expansion of 7.6% in the September quarter.
• Household consumption is supported by urban demand and turnaround in rural demand.
• Manufacturing sector gained strength from easing input cost pressures.
• Buoyancy in the services sector is intact.
• 2/3rd rabi sowing has been completed despite the late Khalifa harvest.
• Healthy twin balance sheets of banks and corporate is expected to propel private sector capex.
• India's foreign exchange (forex) reserves stood at $604 billion for the week ending December 1.

The Indian Rupee exhibits low volatility compared to its peers in the emerging market economies.The surprise element in today’s announcement was the fact that there were absolutely no surprises amid speculations of a slightly hawkish stance, except for some positive changes made to the growth forecast. Markets were also watching out for indications of possibility of the sale of government bonds to reduce liquidity. The governor indicated that there is no requirement to carry out open market sales of bonds, which resulted in a drop in the government bond yields. The sustained pause is expected to boost investor sentiment and improve private consumption as well as boost the real estate sector significantly. At the same time, the RBI has highlighted the risk of over tightening in the backdrop of global slowdown, despite the optimistic view of the growth projections, making it a reasonably balanced view of the overall outlook.

Impact of the Repo Rate Hike

• The recent MPC meetings have aligned with market expectations by keeping the policy rates unchanged.
• Markets rejoiced today as the key rates remained on hold and the growth forecast was raised.The Nifty50 scaled the 21000-mark for the first time. The Sensex rose above 300 points and was close to 70,000 as the announcement concluded.The 10-year government bond yield also dropped by slightly and hovered in the range of 7.226% - 7.256% once the announcement was made.
• At Closing Bell: Markets remained in a range for most of the session and ended with marginal gains. At close, the Sensex was up 303.91 points or 0.44% at 69,825.60, and the Nifty was up 68.20 points or 0.33% at 20,969.40. On the sectoral front, FMCG, oil & gas and power indices down 1% each, healthcare and auto down 0.5% each. On the other hand, bank, Information Technology, Bank and Realty up 0.5-1%. BSE midcap index ended marginally lower, while smallcap index fell 0.4%.The yield on India's benchmark 10-year government bond settled at 7.264% and Indian rupee ended marginally lower at 83.39 per dollar versus previous close of 83.35.