News

Published: June 9, 2023
Updated: June 9, 2023

RBI Maintains Repo Rate at 6.5% in Second Consecutive Pause, Focusing on Inflation Control

The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5% for the second consecutive monetary policy meeting. This move provides relief to borrowers, including those with home loans, vehicle loans, and other retail loans, as it prevents an increase in equated monthly instalments (EMIs). The decision was made unanimously by the six members of the Monetary Policy Committee (MPC) due to inflation remaining above the targeted 4% rate.

Maintaining Focus on Inflation Control:

The MPC, with a majority vote of five out of six members, also affirmed its commitment to the withdrawal of accommodation. In the previous policy meeting in April 2023, the RBI had paused its rate hike cycle after six consecutive rate increases since May 2022. The decision to maintain the repo rate is in line with the RBI's objective to ensure that inflation aligns with the target while supporting economic growth.

Projections and Outlook:

The RBI retained the real GDP growth projection at 6.5% for FY2024 but slightly lowered the inflation projection from 5.2% to 5.1% for the current fiscal year. Governor Shaktikanta Das highlighted that consumer price inflation had eased during March-April 2023 and moved within the tolerance band, declining from 6.7% in the previous year. However, he emphasised that headline inflation remains above the target and is expected to stay so in the coming year. Uncertainties related to the monsoon outlook and the impact of El Nino necessitate continued vigilance on the inflation outlook.

Pause, not a Pivot:

Governor Das clarified that the decision to keep the repo rate unchanged is a pause and not a pivot in the monetary policy stance. He reiterated that the RBI will remain committed to taking necessary monetary actions promptly and appropriately to anchor inflation expectations and bring down inflation to the target level.

Impact of MSP on Inflation:

Regarding the recent increase in minimum support prices (MSP), Deputy Governor Michael Patra stated that it would impact inflation by approximately 10-12 basis points (bps). The RBI had already factored in a portion of the MSP hike into its inflation projections.

Growth Outlook and Liquidity Conditions:

Governor Das acknowledged the resilience of the Indian economy, with prospects for growth steadily improving and becoming broad-based. Positive factors include higher rabi crop production, expected normal monsoon, buoyant services sector, and declining inflation, all of which support household consumption. He also mentioned favourable conditions for the capital expenditure (capex) cycle to gain momentum.

Risks persist

However, risks to growth persist due to weak external demand, global financial market volatility, geopolitical tensions, and potential El Nino effects. The RBI will continue to manage liquidity effectively to ensure adequate resources for the productive requirements of the economy.

RBI's decision to maintain the repo rate at 6.5% for the second consecutive meeting demonstrates its focus on controlling inflation while supporting economic growth. The central bank remains vigilant in monitoring the evolving inflation and growth outlook. The decision is a pause and not a shift in the monetary policy stance. The RBI will take appropriate actions to align with the 4% inflation target, considering the uncertainties in the current economic environment. The resilience of the Indian economy and positive growth prospects are expected to contribute to a sustained recovery, although risks persist.