The Reserve Bank of India (RBI) paused the repo rates at 6.5 per cent for the third time in a row amid concerns over inflation. The decision was reached during the RBI’s third monetary policy committee meeting which commenced on 8 August and lasted three days.
The central bank normally has six bi-monthly meetings per fiscal year where it makes policies regarding interest rates, the money supply, the prospect for inflation and a number of macroeconomic variables.
The RBI Governor, Shaktikanta Das stated, “Monetary Policy Committee has unanimously decided to keep the repo rate unchanged at 6.50 per cent. Indian economy is exuding enhanced strength and stability. Our economy has continued to grow at a reasonable rate, becoming the 5th largest economy in the world.”
He added, “India is uniquely placed to benefit from an ongoing transformational shift in the global economy.” He acknowledged that the world economy continues to face difficult problems related to inflation, geopolitical unrest, and harsh weather, but he exuded optimism that India is likely to survive external headwinds on the front of economic growth.
The repo rate has been maintained for a third time after the RBI’s Monetary Policy Committee (MPC) made that decision. It has remained constant at 6.5 per cent since the RBI hiked it from 6.25 per cent in February. The repo rate being consistent implied that loan EMIs are most likely unaffected.
Consequently, the Standing Deposit Facility (SDF) rate remains at 6.25 per cent and the Marginal Standing Facility (MSF) rate and the bank rate stand at 6.75 per cent.
Three RBI employees and three externals make up the MPC’s six members. Shashanka Bhide, Ashima Goyal, and Jayanth R. Varma are the three external members. Governor Shaktikanta Das is joined in the MPC by Rajiv Ranjan, an executive director, and Michael Debabrata Patra, a deputy governor, both from the RBI.
The committee of the central bank unanimously voted to maintain the repo rate at 6.5 per cent at its previous meeting in early June, as most analysts had predicted. The repo rate was halted by the RBI during its meeting in April as well. With the exception of the halt in April, the RBI increased the repo rate by a total of 250 basis points, or 6.5 per cent, since May 2022 in an effort to combat inflation.
Raising interest rates is a tool of monetary policy that frequently works to restrain economic demand, which lowers inflation. The RBI has been instructed by the government to maintain retail inflation at 4% with a 2% tolerance on either side.
Retail inflation in India exceeded the RBI’s 6% objective for three consecutive quarters and only managed to return to the RBI’s safe level in November 2022. If the Consumer Price Index (CPI)-based inflation is outside the 2 to 6% range for three consecutive quarters, the flexible inflation targeting framework considers the RBI to have underperformed in managing price increases.
The Monetary Policy Committee (MPC) has increased its CPI inflation forecast to 5.4 per cent from 5.1 per cent. Governor Shaktikanta Das expressed concern about the rise in inflation over the past few months and added that it has prompted the central bank to maintain a hawkish stance. He said that after reaching a low of 4.3 per cent in May 2023, inflation rose in June and is expected to surge further during July and August, led by vegetable prices.
Apart from vegetable prices, possible El Nino weather conditions along with global food prices need to be watched closely against the backdrop of a skewed southwest monsoon so far, said Governor Das. He said, “These developments warrant heightened vigilance on the evolving inflation trajectory. The cumulative rate hike of 250 basis points undertaken by the MPC so far is working its way to the economy.”
The interest rate at which the RBI loans money to other banks is known as the repo rate. The repo rate increases are intended to make credit costlier. Banks generally pass on the increased costs to customers and loans become costlier.
The central bank may have decided to again pause the main interest rate due to the ongoing decrease in inflation, which is currently at an 18-month low. Many nations, especially developed ones, have concerns about price increases, but India has done a good job of controlling its trajectory.
