Saturday, 15 Feb, 2025
IndiaTracker.in
Economy 10-Oct, 2024

RBI maintains status quo on repo rate for 10th consecutive time, keeps it unchanged at 6.5 percent

By: Team India Tracker

RBI maintains status quo on repo rate for 10th consecutive time, keeps it unchanged at 6.5 percent

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. Image Source: IANS

Along with the repo rate, the Standing deposit facility (SDF) rate also remained unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent.

The Reserve Bank of India kept the repo rate unchanged at 6.5 percent for the 10th consecutive time. The six-member Monetary Policy Committee (MPC), led by the RBI Governor, made the decision to retain the benchmark repo rate at 6.5 percent. However, the MPC changed its policy stance to ‘neutral’ from ‘withdrawal of accommodation.’ By a majority of 4 to 2, the MPC decided to maintain the policy rate. The Reserve kept its projections for real GDP growth in FY25 at 7.2 percent and CPI inflation at 4.5 percent. Before considering any change in the policy, RBI Governor Shaktikanta Das  has repeatedly stressed the need to keep focussing on bringing inflation down to the 4 percent target in a sustainable manner. 

The shift to a neutral monetary policy stance suggests that the prospects are now in favor of a short-term decrease in the repo rate, or the interest rate at which the RBI loans money to banks.

The MPC adjusted its position in response to the problems facing the global economy and the geopolitical environment. The RBI continues to be unwaveringly focused on inflation and the alignment with the MPC targets in light of the current inflation and economic conditions. Three new members of the RBI's monetary policy panel were appointed by the Center earlier this month. 

RBI Governor Shaktikanta Das said, “It is with a lot of effort that the inflation horse has been brought to the stable, i.e., closer to the target within the tolerance band compared to its heightened levels two years ago. We have to be very careful about opening the gate as the horse may simply bolt again. We must keep the horse under a tight leash, so that we do not lose control. Going forward, we need to closely monitor the evolving conditions for further confirmation of the disinflationary impulses.”

Madan Sabnavis, Chief Economist, Bank of Baroda, said, “The policy did surprise with a change in stance being unanimously passed. This does indicate that a rate cut will be in the offing in future provided the data turns out to be acceptable. Interestingly the RBI has projected inflation at 4.8% for Q3 which is the highest for the 4 quarters this year. This gives a sense that the earliest that we can see a rate cut will be in February given the three major inflation risks highlighted by the Governor: weather, geo-politics and global commodity prices. The fact that growth is on a stable path provides comfort that there is no urgent need to lower the rates at this point of time.”

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 last 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

With Nagesh Kumar, the recently appointed external MPC member and director and CEO of the Institute for Studies in Industrial Development, voted in favor of a 25 basis point (bps) reduction in the repo rate, the decision to maintain the current rate was made by a 5:1 majority. One basis point is one-hundredth of a percentage point.

The 4.5 percent CPI estimate for FY2025 was maintained by the RBI. Nonetheless, the RBI projects that inflation will decrease to 4.1 percent in Q2 FY25 from the 4.4 percent forecast in the August policy. It is anticipated that inflation will be 4.8 percent in Q3 and 4.2 percent in Q4, respectively, which is less than the 4.7 percent and 4.3 percent predicted earlier. The Reserve Bank of India has reduced its inflation prediction for the first quarter of FY26 down from 4.4 percent to 4.3 percent.

Mandar Pitale, Head Treasury, SBM Bank India Ltd, said, “The Monetary Policy Committee (MPC) has changed the stance to neutral deriving comfort from well poised Growth Inflation equilibrium. There is a hawkish undertone to policy verdict in terms of persistent focus on tight vigilance on the near-term trajectory of the inflation to safeguard against systemic risks to inflation outlook. The sustained momentum in domestic growth, with private consumption and investment growing in tandem are instrumental in providing space to MPC to focus on inflation, ensuring its durable descent to the 4 per cent target amidst expectation of near-term spikes. While the growing divergence in inflation-growth dynamics across countries will result in varying monetary policy responses going ahead, MPC is expected to remain unambiguously focused on a durable alignment of inflation with the target. The decision to change the stance to neutral will impart enough flexibility to MPC to act on policy rates in the near future if inflation moderates on a durable basis on expected lines.” 

Other than maintaining the status quo on the repo rate, some other decisions taken by the MPC are - a) Broadening the scope for Responsible Lending Conduct norms to include MSEs, b) Creation of Reserve Bank Climate Risk Information System, c) Enhancement of transaction and wallet limits for UPI, and d) Introduction of beneficiary account name look-up facility for RTGS and NEFT. 

Along with the repo rate, the Standing deposit facility (SDF) rate also remained unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent. 

The next meeting of the Reserve Bank of India’s Monetary Policy Committee is scheduled from December 4 to 6.

Share: