Image used for representative purpose only
| Photo Credit: PTI

Equity benchmark indices Sensex and Nifty continued to trade lower on Thursday (August 8) after the Reserve Bank of India decided to keep the policy rate unchanged for the ninth time in a row, saying food inflation remains stubborn.

Continuous foreign fund outflows and weak trends in the U.S. markets also drove domestic equities lower.

Extending its early trade decline, the 30-share BSE Sensex tumbled 570.09 points to 78,897.92. The NSE Nifty tanked 178.2 points to 24,119.30.

The rate increase cycle was paused in April last year after six consecutive rate hikes, aggregating to 250 basis points since May 2022.

Announcing the third bi-monthly monetary policy for the current financial year, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) has decided to keep the repo rate unchanged at 6.5%.

He said MPC will remain watchful of elevated food inflation.

“RBI MPC is in wait and watch mode and has kept the interest rates unchanged, waiting for clues from the largest Central Bank of the world, the US Federal Reserve, before acting. Stock markets will continue to consolidate in the meanwhile,” said Umeshkumar Mehta, CIO, SAMCO Mutual Fund.

Among the 30 Sensex firms, Power Grid, Infosys, Larsen & Toubro, JSW Steel, UltraTech Cement and Asian Paints were the biggest laggards.

Tata Motors, HDFC Bank, Tech Mahindra and ITC were among the gainers during the initial trade.

In Asian markets, Shanghai and Hong Kong traded higher while Seoul and Tokyo quoted lower.

The U.S. markets ended lower on Wednesday.

Foreign Institutional Investors (FIIs) offloaded equities worth ₹3,314.76 crore on Wednesday, according to exchange data.

“During the last four days, FIIs have sold ₹20,228 crore in the cash market. This is a rational thing to do given India’s elevated valuations and the concerns surrounding recession fears in the US and further issues relating to the unwinding of the yen carry trade,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Global oil benchmark Brent crude climbed 0.17% to USD 78.46 a barrel.

On Wednesday, the BSE benchmark Sensex rallied 874.94 points or 1.11% to settle at 79,468.01. During the day, it jumped 1,046.13 points or 1.33 per cent to 79,639.20.

The NSE Nifty jumped 304.95 points or 1.27% to 24,297.50. Intraday, it surged 345.15 points or 1.43% to 24,337.70.

RBI Governor Shaktikanta Das on June 7, 2024, said the Monetary Policy Committee has decided to keep the repo rate unchanged at 6.5%. File
| Photo Credit: ANI

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5%. The decision, taken at the MPC’s meeting on Friday, marks the eighth time in a row that the policy rate has been put on hold to keep the focus on battling high inflation.

The MPC has revised its GDP growth forecast upwards from the earlier 7% estimate to 7.2% for the financial year 2024-2025. It has also decided to remain focused on withdrawal of accommodation to ensure that inflation does not accelerate, 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% within a band of +/- 2% while supporting growth,” Reserve Bank of India (RBI) governor Shaktikanta Das said after the meeting. 

Divided MPC

Mr. Das, along with MPC members Shashanka Bhide, Rajiv Ranjan, and Michael Debabrata Patra voted to keep the policy repo rate unchanged at 6.5% and to remain focused on the withdrawal of accommodation, while their colleagues Ashima Goyal and Jayanth R. Varma voted to reduce the policy repo rate by 25 basis points and for a change in stance to neutral. 

“There were signs of a more divided policy committee, with one additional member voting for a softening in stance as well as policy direction. The majority retained their cautious stance to guide inflation towards the 4% target on a durable basis, despite recent signs of disinflation,” said Radhika Rao, Executive Director and Senior Economist, DBS Bank, commenting on the decision.

Higher growth forecast

According to the MPC, high frequency indicators of domestic activity are showing resilience in 2024-25. The south-west monsoon is expected to be above normal, which augurs well for agriculture and rural demand, but headwinds from geopolitical tensions, volatility in international commodity prices, and geoeconomic fragmentation pose risks to the outlook. 

Taking various factors into consideration, real GDP growth for 2024-25 was projected at 7.2% as compared with the earlier projection of 7%, with the first quarter (Q1) growth estimate at 7.3%; Q2 at 7.2%; Q3 at 7.3%; and Q4 at 7.2%. The risks are evenly balanced.

Elevated food inflation

Emphasising that inflation has seen sequential moderation since February 2024, albeit in a narrow range from 5.1% in February to 4.8% in April 2024, the RBI Governor said that food inflation, however, remains elevated due to persistence of inflation pressures in vegetables, pulses, cereals, and spices. 

“Looking ahead, overlapping shocks engendered by rising incidence of adverse climate events impart considerable uncertainty to the food inflation trajectory,” he said, while announcing the MPC’s decisions. He added that volatility in crude oil prices and financial markets, along with the firming up of non-energy commodity prices, pose upside risks to inflation. 

Taking various factors into account, CPI inflation for 2024-25 is projected at 4.5%, with Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6%; and Q4 at 4.5%. The risks are evenly balanced.

Mr. Das emphasised that the path of disinflation has been interrupted by volatile and elevated food inflation due to adverse weather events. “Inflation is expected to temporarily fall below the target during Q2:2024-25 due to favourable base effect, before reversing subsequently. The MPC will remain resolute in its commitment to aligning inflation to the 4% target on a durable basis,” he said. 

The MPC reiterated the need to continue with the disinflationary stance, until a durable alignment of the headline CPI inflation with the target is achieved.