RBI keeps repo rate steady at 6.5%: Comparing India’s repo rate with US, UK and its South Asian neighbours

By: Yash Gupte

Talking about Pakistan, the country’s central bank raised the interest rate to 21 percent on Tuesday, April 4, 2023, as the economically devastated country is struggling to lower the food inflation and ensure confidence of foreign creditors.

The Reserve Bank of India has put a hold to its repo rate hike spree. The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Thursday, April 6, 2023 decided not to hike the repo rate and kept is steady at 6.5 percent. The RBI was widely expected to increase the repo rate by 25 basis points to 6.75 percent, the highest till date. The decision was announced by Shaktikanta Das, the governor of RBI in a press conference held on Thursday. The first bimonthly policy for FY24 was announced by the RBI monetary policy committee on April 6, concluding a three-day meeting. The MPC convened on April 3, 5, and 6 to discuss the current monetary policy, under the direction of RBI Governor Shaktikanta Das.

During the press conference, Shaktikanta Das, RBI Governor said, “"If I have to characterise today's monetary policy in just one line...it's a pause, not a pivot." He added that “the central bank's policy stance remains focused on "withdrawal of accommodation", signaling it could consider further rate hikes if necessary. The pause in rate hikes is "for this meeting only."

Prior to today’s meeting, the MPC had convened a meeting on February 8, 2023 when it had hiked the repo rate by 25 basis points to 6.50 percent. That was the sixth repo rate hike announced by the RBI in Financial Year 2022-23. Previously, the central bank had raised the repo rate by 35 basis points 50 basis points in September, 50 basis points in August, 50 basis points twice in June and 40 basis points in May.

Although it decreased from 6.52 percent in January to 6.44 percent in February, retail inflation has stubbornly remained above the RBI's stipulated target range of 2 percent to 6 percent. Unusual rains could cause food costs to rise sharply, and OPEC's recent decision to reduce output has also increased oil prices, which could increase imported inflation. The marginal fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered limited success.

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The MPC had increased the benchmark interest rate by 250 basis points in the previous fiscal year in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

The inflation rate crossed the RBI’s threshold of 6 percent in January (6.01 percent), which quickly jumped to 6.95 percent in March and hit the peak at 7.79 percent in April. This indicates that the prices of goods and services increased drastically in March and April. The primary reason behind the drastic increase was the disruption in supply chains caused by the Russia-Ukraine conflict. There was a drop in CPI in May, June and July as the government banned the export of wheat and sugar in order to increase its availability in the local market and cool down its prices. The retail inflation measured by the CPI came down below the mark of 6 percent in November for the first time in 2022. The fall in food prices and the implementation of the RBI’s tight monetary policy under which it has been increasing the repo rate had contributed in the decline in retail inflation in the month of November and December. But the trend was again reversed in the month of January 2023 as the retail inflation breached the mark of 6 percent and jumped to 6.52 percent.

The governor had also stated that in a world of high uncertainty, giving out explicit forward guidance on the future path of monetary policy would be counterproductive. The decision of not hiking the repo has surprised many experts as they very pretty confident about the hike. Jyoti Prakash Gadia, Managing Director at Resurgent India "The RBI has today sprung a big surprise by keeping the repo rate unchanged. Despite the volatility and uncertainties, the decision of RBI to maintain a status quo in policy rates is a very bold step which indicates the RBI’s resolve to assess the situation and support growth in the current growth inflation trade-off.”

After taking a look at the repo rate changes in India, let us have a look at the repo rates in USA, UK, Brazil, Pakistan, Bangladesh and Sri Lanka.

Sri Lanka currently has the highest repo rate/ bank rate at 24.5 percent. In order to get a $2.9 billion IMF package, the government is awaiting finance pledges from China, Sri Lanka's largest bilateral lender, as the country's economy is currently experiencing its worst financial crisis since gaining independence from Britain in 1948. The Standing Lending Facility rate was held steady at 15.50 percent while the Standing Deposit Facility Rate was kept unchanged at 14.50 percent, remaining at their highest levels since August, 2001. Consumer inflation decreased to 57.2 percent in December after reaching an annual high of 68.9 percent in September, when food inflation increased to 93.7 percent.

Talking about Pakistan, the country’s central bank raised the interest rate to 21 percent on Tuesday, April 4, 2023, as the economically devastated country is struggling to lower the food inflation and ensure confidence of foreign creditors. The State bank of Pakistan has hiked its key rate by a cumulative 1025 bps since January 2022. Prices for food, beverages, and transportation have all increased by more than 45 percent, which is straining household budgets and driving many people to the brink of insolvency. As part of a $6.5 billion bailout agreement made in 2019, Pakistan is in negotiations with the International Monetary Fund to release its next loan tranche of $1.1 billion.

In keeping interest rates constant for the fifth straight policy meeting on March 22, Brazil's central bank highlighted rising inflation predictions, raising government concerns and undermining prospects of impending monetary easing. The Selic benchmark interest rate was maintained at 13.75 percent by the bank's rate-setting body, Copom.

Talking about the United Kingdom, the country’s central bank hiked the repo rate by 25 basis points to 4.25 percent. The Bank’s monetary policy committee (MPC) voted by a majority of seven to two to increase the base rate for the 11th time in a row. As a result of food prices rising at the quickest rate in 45 years, the UK's inflation rate unexpectedly increased in February to 10.4 percent from 10.1 percent. The official inflation target set by the Bank is 2 percent. Despite concerns regarding the failure of Silicon Valley Bank and the Swiss government-mediated bailout of Credit Suisse by competitor lender UBS, central banks on both sides of the Atlantic have continued raising interest rates. On Wednesday, the US Federal Reserve increased its benchmark interest rate by 0.25 percentage points, bringing it to a range of 4.75 percent-5 percent.

The Federal Reserve has been aggressively raising interest rates since March 2022 in an effort to keep inflation under control. Rates have been lifted by a total of 4.5 percent, which has resulted in a sharp rise in interest rates in a variety of industries. One noticeable impact of the high rates, nevertheless, was Silicon Valley Bank's decision to start withholding deposits as a result of cash flow issues. This caused a sizable slump.

Though India’s central bank has decided not to hike the repo rate in its latest MPC meeting, Governor Shaktikanta Das and other field experts have indicated that the RBI is expected to increase the repo rate in its upcoming MPC meetings.