Thursday, 10 Oct, 2024
The MPC has opted to keep the repo rate at its current level at its fifth meeting. Image Source: IANS
In an attempt to slow down the rising inflation, which fell to a four-month low of 4.87 percent in October, the RBI has increased the repo rate by a total of 250 basis points (bps) since May 2022.
Following its meeting in December, the Monetary Policy Committee (MPC) of the Reserve Bank of India unanimously agreed to maintain the repo rate at 6.5 percent. The MPC maintained the policy stance of 'withdrawal of accommodation' by the majority of 5 out of 6 members. The MPC has opted to keep the repo rate at its current level at its fifth meeting. In February 2023, the MPC last increased this rate by 25 basis points, to 6.50 percent. 5 out 6 MPC members voted in favour of withdrawal of accommodation, said RBI Governor Shaktikanta Das.
“The Reserve Bank of India’s Monetary Policy Committee after a detailed assessment of the evolving macroeconomic developments, has decided unanimously to keep the repo rate unchanged at 6.5 per cent,” said RBI Governor Shaktikanta Das amid India’s better-than-expected economic growth.
In an attempt to slow down the rising inflation, which fell to a four-month low of 4.87 percent in October, the RBI has increased the repo rate by a total of 250 basis points (bps) since May 2022. However, it is anticipated that the rate would stay over the 4 percent medium-term objective for some time.
RBI Governor Shaktikanta Das said, “The moderation in retail inflation in October to 4.87 percent from June’s high of 7.4 percent, has been broad based. The near-term outlook however is marked by food inflation pressures which may show up in November as well as December. Against this backdrop, the MPC remains highly alert and prepared to take appropriate actions as necessary.”
Thanks to government expenditure and manufacturing, India's economy expanded 7.6 percent in the July–September quarter, significantly higher than the polled median of 6.8 percent and the RBI's estimate of 6.5 percent. This increase in growth has raised expectations that the third-largest economy in Asia will surpass its own projections for the entire year. For the current fiscal year, the central bank predicted that retail inflation based on the Consumer Price Index (CPI) would be 5.4 percent. The MPC meeting was held against the backdrop of October's 4.87 percent decrease in inflation.
According to the most recent data from the Ministry of Statistics and Programme Implementation, India's retail inflation, which is determined by the consumer price index (CPI), decreased to a four-month low of 4.87 percent in October 2023 from 5.02 percent in September of this year. May saw the lowest CPI of the year, at 4.25 percent. The CPI has fluctuated between 4.06 percent in January 2021 and 7.79 percent in April 2022 over the past two years. In the past, the government has announced a number of initiatives to lower inflation, including lowering import duties on essential raw materials and crude edible oils and lowering the excise tax on petrol and diesel.
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 CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 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.
Source: Ministry of Statistics and Programme Implementation
Upasna Bhardwaj, chief economist, Kotak Mahindra Bank told Reuters, “The CPI inflation came in line with our expectations. The moderation provides some relief, especially as core inflation has remained comfortable. However, we expect the trend of sub-5% headline inflation to remain brief with most of FY24 ahead likely to remain above 5%. Overall, we continue to expect the MPC to remain on an 'extended pause' phase in rates, with liquidity being used as a more frequent tool to manage the stance.”
Retail inflation fell in October, as expected by economists who pointed out that after a rise in July and August, volatile food prices—which account for over half of the CPI basket—had levelled off. Even though October saw a decrease in retail inflation, the RBI and analysts are nonetheless concerned about growing prices for onions and crude oil because these commodities have the potential to cause inflation to rise in the months ahead.
During the bi-monthly MPC meeting, RBI Governor Shaktikanta Das announced that India’s foreign exchange reserves reached $604 billion for the week ending December 1. This marked an increase of $2.54 billion compared to the previous week’s reserves, which stood at $597.94 billion as of November 24.
Commenting on the RBI’s decision of maintaining the status quo regarding the repo rate, Dharmakirti Joshi, Chief Economist, CRISIL said, “Unsurprisingly, the Monetary Policy Committee of the Reserve Bank of India (RBI) maintained the status quo on rates and stance. The RBI’s GDP growth forecast for this fiscal was revised up to 7.0% from 6.5% in view of the better-than-expected rise in the July-September quarter. Although the repo rate has been left unchanged, there could be de facto tightening as the RBI may continue to use liquidity compression as and when needed to speed up transmission and rely on macro prudential measures to manage risks to financial stability. The recently raised risk weights for unsecured, credit card and non-bank lending will crank up capital requirements of financiers and put pressure on lending rates. Additional announcements today for connected lending and digital lending underscores RBI’s vigil on buoyant credit growth. This fiscal began with a pause on rates and stance and will end the same way. We expect rate cuts only in the first quarter of the next fiscal.”
