The Reserve Bank of India on Thursday hit the pause button and decided to keep key benchmark policy rate at 6.5 per cent even as inflation is trending above its tolerance level.

The rate hike has been paused after six consecutive rate increases aggregating to 250 basis points since May 2022.

Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) will not hesitate to take action in the future.

While keeping the interest rate intact, Das said core inflation remains sticky.

Core inflation generally refers to inflation in manufactured goods.

Retail inflation in February stood at 6.44 per cent compared to 6.52 per cent in the previous month. MPC takes into account retail inflation numbers for setting the interest rates.

However, inflation is expected to moderate in the current fiscal. Many institutions, including the World Bank and Asian Development Bank, have predicted that inflation would cool down to about 5 per cent this financial year.

For the next fiscal, RBI projected a growth rate of 6.5 per cent as compared to 6.4 per cent estimated in February. In the latest Economic Survey of the finance ministry, growth was projected at 6-6.8 per cent for 2023-24.

Last month, the US Federal Reserve announced another 25 basis points interest rate hike to tame inflation.

With the hike, the Fed has increased the federal funds rate from nearly zero in March 2022 to a range of 4.75-5 per cent.

The European Central Bank and Bank of England have also hiked their benchmark rates.

RBI projects FY24 inflation at 5.2%

The Reserve Bank projected marginal easing in retail inflation to 5.2 per cent in the current fiscal, but cautioned that the fight against inflation is far from over.

Although the Reserve Bank pared its inflation estimate from its February projection of 5.3 per cent, RBI Governor Shaktikanta Das said the inflation outlook remains dynamic amid the recent jump in crude oil prices on account of OPEC decision to cut output.

Taking into account a crude oil price of USD 85 per barrel and a normal monsoon, the retail inflation in the current fiscal is projected to be 5.2 per cent with risks evenly balanced, Das said.

For the June quarter, the retail inflation is expected to average 5.1 per cent, and rise to 5.4 per cent each in the September and December quarter.

It is expected to decline to 5.2 per cent in the March 2024 quarter.

Das said the Central bank's war against inflation will continue until the inflation is brought down to target level.

"The fight against inflation is far from over....," the Governor said in the monetary policy statement.

The RBI has the mandate of keeping inflation at 4 per cent, with a band of (+/-) 2 per cent on either side.

Retail inflation has remained above the RBI's upper tolerance level of 6 per cent for two months and in February it was 6.44 per cent.

Economic growth projection marginally revised

The Reserve Bank marginally revised upwards the economic growth projection for the current fiscal to 6.5 per cent, from its earlier estimate of 6.4 per cent.

Unveiling the first bi-monthly monetary policy of 2023-24 fiscal, RBI Governor Shaktikanta Das said the GDP growth in the first quarter of 2023-24 is expected at 7.8 per cent.

The growth for second, third and fourth quarter of the current fiscal has been projected at 6.2 per cent, 6.1 per cent and 5.9 per cent, respectively.

The World Bank in its latest 'India Development Update' (IDU) has slashed the Gross Domestic Product (GDP) forecast to 6.3 per cent, against the earlier estimate of 6.6 per cent in 2023-24.

Asian Development Bank also expects India's economic growth to moderate to 6.4 per cent due to tight monetary conditions and elevated oil prices, as compared to 6.8 per cent expansion for the financial year ended March 2023.