RBI Holds Steady: Repo Rate Unchanged Amid Economic Shifts

The Reserve Bank of India (RBI) has opted to maintain the status quo, keeping the repo rate unchanged at 6.5% in its latest monetary policy review. The decision, driven by a 5:1 majority within the Monetary Policy Committee (MPC), aligns with the policy stance of 'withdrawal of accommodation.'

Despite a robust second-quarter GDP growth of 7.6%, surpassing the earlier estimate of 6.5%, the RBI has chosen to exercise caution. The revised growth forecast for FY2024 stands at 7%, reflecting the economic shifts. However, inflation risks, particularly due to a recent spike in vegetable prices, have led to the decision to retain the repo rate.

What does this mean for borrowers and savers? Interest rates on home, vehicle, personal, and other loans will remain unchanged for now. The RBI's decision also implies stability in deposit rates. However, certain retail loans may see increased costs as the RBI raised risk weights on retail loans recently.

Banks that have linked their lending rates to the repo rate will not experience a rise, providing relief to borrowers. The move ensures that equated monthly instalments (EMIs) will not witness an increase for loans linked to the repo rate.

The decision marks the fifth consecutive policy review where the RBI has maintained the repo rate at 6.5%, emphasizing the central bank's cautious approach. The recent spike in vegetable prices has raised concerns about inflation, prompting the RBI to prioritize price stability while supporting growth.

RBI Governor Shaktikanta Das highlighted the potential uptick in food inflation in November and December, masking the near-term inflation outlook. The central bank remains committed to maintaining the 4% inflation target.

While GDP growth has been impressive in the second quarter, reaching 7.6%, concerns about the impact of El Nino on rainfall and agricultural output in the second half of the fiscal year could lead to a moderation in growth. Economic indicators, including two-wheeler and FMCG sales, indicate weaknesses in rural incomes.

The decision to retain the policy stance as the 'withdrawal of accommodation' aligns with the RBI's ongoing efforts to balance inflation and growth. Despite the 250 basis points hike in the policy rate since May 2022, the transmission to lending rates has not been complete, prompting the continuation of the current stance.

As the RBI maintains a slightly deficit system liquidity level, the possibility of deploying tools like Open Market Operations (OMO) to manage liquidity is under consideration. The central bank aims to ensure better transmission of interest rates in the market.

The RBI's decision reflects a cautious approach in the face of economic shifts and inflationary pressures. Borrowers can expect stability in interest rates, while the central bank remains vigilant in navigating the evolving economic landscape. #RBIMonetaryPolicy #RepoRate #EconomicOutlook