RBI keeps repo rate unchanged at 6.5%

The Reserve Bank of India surprised markets by keeping the repo rate unchanged at 6.5%. The move acted as a breather for the borrowers, as it will hit a pause on their lending rates linked to the repo rate. 

New Delhi, April 10: In an unexpected move, the Reserve Bank of India kept the repo rate unchanged at 6.50% last week. The federal bank, in its Monetary Policy Statement, stated that the standing deposit facility (SDF) rate will remain unchanged at 6.25%, and the marginal standing facility (MSF) rate and the bank rate at 6.75%.

The Monetary Policy Committee, or MPC, has also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target of 6%, while supporting growth. The decision to keep the repo rate unchanged was taken unanimously by the six-member MPC.

On the release of the MPS, the RBI governor Shaktikanta Das said, “While the recent high-frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns.”

“Headline inflation is moderating but remains well above the targets of central banks. These developments have led to heightened volatility in global financial markets, as reflected in sizeable two-way movements in bond yields,” he added.

RBI’s decision to keep the rates unchanged came as a surprise to many who had expected a hike of 25 bps  followed by a prolonged pause. Economists had also expected the hike to be in line with the hike announcements by the US Fed and ECB.

In simple terms, Repo Rate or Repurchase Agreement or Repurchasing Option is the interest rate at which the Reserve Bank of India (RBI) loans money to commercial banks. Banks obtain loans from the federal bank by selling qualifying securities.

The current repo rate in India fixed by RBI is 6.5% as on February 8, 2023 and has since remained unchanged. The repo rate is utilized by the Central Bank to restrict the flow of money in the market. When the market is impacted by inflation, the RBI raises the repo rate.

In its official statement, RBI has said that the reason for the repo rate to remain changed is due to the global economy and domestic market both remaining resilient. It estimates that the inflation trajectory for 2023-24 would be shaped by both domestic and global factors. The apex financial body, however, noted that the volatile situation of agriculture needs to be closely monitored. While in February, India’s crops had to endure unexpected heat waves,  the unprecedented unseasonal rains and hailstorms in Marchmade some substantial damage.

The MPC added, “Milk prices could remain firm due to high input costs and seasonal factors. Crude oil price outlook is subject to high uncertainty. Global financial market volatility has surged, with potential upsides for imported inflation risks. Easing cost conditions are leading to some moderation in the pace of output price increases in manufacturing and services, as indicated by the Reserve Bank’s enterprise surveys. The lagged pass-through of input costs could, however, keep core inflation elevated.”

“Taking into account these factors and assuming an annual average crude oil price (Indian basket) of US$ 85 per barrel and a normal monsoon, CPI inflation is projected at 5.2% for 2023-24, with Q1 at 5.1%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.2%, and risks evenly balanced,” the RBI said.

With CPI headline inflation ruling persistently above the tolerance band, the MPC decided to remain resolutely focused on aligning inflation with the target. While the policy rate has been increased by a cumulative 250 bps since May 2022, which is still working through the system, RBI has announced that there can be no scope for letting down the guard on price stability.

“Taking these factors into account, the MPC decided to keep the policy repo rate unchanged at 6.50 percent in this meeting, with readiness to act, should the situation so warrant. The MPC will continue to keep a strong vigil on the evolving inflation and growth outlook and will not hesitate to take further action as may be required in its future meetings. The MPC also decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth,” the RBI added.