The Reserve Bank of India (RBI) continued its trend of holding policy rates unchanged in its recent April announcement. The non-action by the RBI was in line with market expectations, reflecting the prevailing economic conditions and policy considerations.
The RBI’s decision to maintain the status quo aligns with the backdrop of a robust growth trajectory and inflationary pressures. The central bank’s reinforcement of a stable rate stance underscores the nuanced interplay between economic expansion and inflation management.
Indicative of the prevailing economic sentiment, the second advance gross domestic product (GDP) estimate released earlier had showcased a resilient growth trajectory, with the economy surpassing expectations. The notable growth of over 8 per cent in the initial three quarters contributed to a commendable fiscal growth of 7.6 per cent. Additionally, high-frequency data exhibited sustained momentum, with the composite Purchasing Managers’ Index (PMI) for March registering a robust 61.8, firmly situated in the expansionary territory.
The resilience of non-farm sectors, comprising construction, manufacturing, and financial services, was pronounced, marked by surpassing tax collections and solid performance. However, agricultural growth, although modest, reflected an anaemic 0.7 per cent in 2023-24, presenting a mixed picture of the economy’s performance.
The sustenance of this growth momentum informed the RBI’s decision to maintain the policy repo rate at 6.5% and the unchanged policy stance of ‘withdrawal of accommodation’. The Committee emphasized the importance of monitoring food prices’ uncertainties, acknowledging potential challenges in inflation management while acknowledging the upside risks.
Furthermore, amidst the backdrop of heightened growth prospects, the RBI’s steadfast focus on inflation and its alignment towards the 4% target signalled a commitment to ensuring inflation’s descent. This cohesive strategy aimed to navigate through the challenges posed by evolving inflation dynamics and ensure stability in the broader economic landscape.
The market responded in an unsurprising manner to the RBI’s policy stance, as both the equity and bond markets exhibited marginal movements. The marginally increased 10-year G-Sec reflected the tempered market reaction, aligning with the anticipated policy trajectory.
In summary, the RBI’s decision to uphold policy rates in April underscored the careful calibration of economic growth, inflation dynamics, and the evolving fiscal policy landscape. The central bank’s commitment to achieving the inflation target while navigating the complexities of a robust growth environment testifies to the nuanced policy approach required to foster stability and resilience in India’s financial markets and broader economy.
