The RBI monetary policy committee (MPC) announced the first bi-monthly policy for FY24 on April 6, concluding a three-day meeting. The MPC, led by RBI Governor Shaktikanta Das, met on April 3, 5 and 6 to review the current monetary policy.

Many experts anticipated the RBI will increase key interest rates by 25 basis points (bps) to 6.75% to tackle persistently high inflation, which has remained above the RBI's comfort zone of 6% for most of the time.

RBI Policy LIVE updates

In March, the US Federal Reserve hiked interest rates by 25 basis points. However, the Central bank also indicated its intention to pause further rate hikes due to concerns about the stability of the banking sector. The decision was made in light of the recent collapse of three US banks: Silvergate, Silicon Valley Bank (SVB) and Signature Bank.

Since March 2022, the Federal Reserve has been increasing interest rates at an aggressive pace in an attempt to control inflation. So far, rates have been raised by 4.5%, leading to a significant increase in interest rates across various sectors. However, one notable consequence of the high rates occurred when Silicon Valley Bank faced cash shortages and began withdrawing deposits. This triggered a significant downturn.

Also Read: What to expect from the MPC meet

India's economy remains stable and is positioned better than most economies despite global uncertainties, according to a report by Nuvama. The country's growth momentum is supported by high-frequency indicators such as GST collections, automobile sales, fuel consumption, PMI manufacturing and services, which have registered higher annualised growth rates and sequential improvements.

However, the domestic brokerage noted a cause for concern with the jump in India's headline CPI inflation in January 2023 and its persistence in February 2023. The inflation rate of 6.4%-6.5% YoY not only reversed the moderation seen in retail inflation in the previous months but also breached the RBI's upper tolerance of inflation targeting band.

Despite the hike in interest rates, bank credit offtake has shown a strong resurgence in FY23. The improvements have been broad-based across segments, reflecting the resilience of the economy and the ability of consumers to withstand higher rates, according to Nuvama. Incremental credit offtake growth for 1 April 2022-10 March 2023 was 13.9% while comparable deposit growth stood at 8%.

Also Read: Will banks' turmoil in West play a role in MPC's rate hike decision?

The report also noted a sharp reversal in the domestic banking system liquidity. After experiencing ample surplus liquidity for over three years, the liquidity surplus has registered a notable decline, from an average of ₹6.5 lakh crore in April 2022 to a deficit of ₹0.4 lakh crore in March 2023.

While India's economy continues to remain stable amid global uncertainties, the persistence of high inflation and the decline in liquidity surplus in the banking system pose significant challenges.