Hopes of an early reduction in rates have, however, been dashed with RBI predicting inflation to remain above its target and the money market is being kept on its toes with the promise of the RBI actively managing liquidity fluctuations. Thursday marked a status quo in rates for a year, with the last increase in the current cycle of rate hardening taking effect in February 2023. But the cracks in the MPC began to widen to interest rates from monetary stance, with both decisions voted 5 to 1 as the panel retained its ‘focus on the withdrawal of accommodation’. External member JR Varma voted for a reduction in interest rates by 25 basis points.
“The ongoing conflicts and the emergence of new flashpoints in different parts of the world, with disruptions in the Red Sea being the latest, impart uncertainty to the global outlook,” said Governor Shaktikanta Das.
FY25 inflation projected at 4.5%
“Monetary policy must continue to be actively disinflationary to align inflation to the target of 4% on a durable basis,” he said.
The repo rate, or the rate at which the central bank lends to banks, will remain at 6.5% and so will be the other rates. Financial markets were volatile as they sought to decipher the tone of the governor, with experts believing that odds have now lengthened on rate easing in the first half of FY25.
The Sensex declined 1% to 71,428.43, while the rupee closed steady at 82.96 per US dollar. Yield on the benchmark bond ended the day one basis point higher at 7.08%. Bond prices and yields move inversely. Banking shares, however, retreated on fading hopes of a reversal in the rate cycle, with the Bank Nifty, loaded in favour of megacap private banks, falling 1.76%.
“They have maintained a status quo, but the current monetary stance has become irrelevant because it neither describes the prevalent monetary conditions nor does it give guidance about the future,” said A. Prasanna, Head of Research at ICICI Securities Primary Dealership Ltd.
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