The policy repo rate has been kept stable at 6.5% for the fifth consecutive time in the recent Monetary Policy Committee (MPC) meeting of the Reserve Bank of India (RBI) chaired by Governor Shaktikanta Das. The decision follows six consecutive rate hikes by a total of 250 basis points from May 2022 onwards. In this article, we highlight the highlights of the RBI MPC meeting and economic insights shared by Governor Das.
1. Unbreakable Repo Rate:
Governor Das announced the unanimous decision of the MPC to maintain the policy repo rate at 6.5%. This consistent approach marks a pause in the rate hike cycle that began in May 2022, reflecting the central bank’s commitment to economic stability.
2. GDP Growth Estimates:
Despite keeping the repo rate unchanged, Governor Das shared positive news on India’s economic front. The GDP growth projection for the current financial year has been raised to 7% from 6.5%, indicating resilience and strength in the Indian economy.
3. Inflation Outlook:
The MPC meeting took place against the backdrop of a decline in inflation, with the October rate at 4.87%, a four-month low. Governor Das highlighted the RBI’s estimate of consumer price-based inflation (CPI) at 5.4% for the current fiscal year. The central bank aims to maintain CPI inflation at 4%, with a 2% margin on either side, as ordered by the government.
4. Pay attention to housing clearance:
Governor Das emphasized that the MPC, with a majority of five out of six members, is committed to withdrawing the adjustment to progressively align inflation with the target while supporting economic growth. This strategic approach aims to strike a balance between curbing inflationary pressures and promoting economic growth.
5. Strong GDP growth in the second quarter:
Governor Das highlighted the strong GDP growth of 7.6% during the July-September quarter, making India the fastest growing major economy. This growth momentum, coupled with 7.8% GDP growth in the April-June quarter, underlines the resilience of the Indian economy.
6. Status Quo in Monetary Policy:
The RBI MPC’s decision to keep the repo rate unchanged is in line with its consistent stance in the last four meetings. The repo rate, the interest rate at which the RBI lends to other banks, remained at 6.5%, reflecting a cautious outlook amid economic dynamics.
7. Inflation Management Strategies:
The RBI’s strategic move to pause repo rate hikes has been attributed to the relative decline in inflation, which is in line with its comfort level. While inflation has been a global concern, India’s inflation trajectory has been managed effectively, leading to a balanced monetary policy approach.
The RBI MPC’s decision to keep the repo rate at 6.5% signals a commitment to stability amid economic changes. Governor Shaktikanta Das’ positive remarks on GDP growth and careful consideration of inflation management strategies reinforce the central bank’s important role in steering India’s economic trajectory. As the country navigates challenges, the RBI’s prudential approach is aimed at promoting sustainable growth while guarding against inflationary pressures.
Credit:
RBI MPC Meet: Repo rate unchanged at 6.5% for fifth time in a row, says governor Shaktikanta Das
Notes:
Repo Rate
Definition: Repo, short for ‘repurchase option’ or ‘repurchase agreement’, is a short-term borrowing mechanism where banks borrow money in exchange for securities from the Central Bank (RBI) with an agreement to repurchase them at a predetermined price.
Function: RBI uses the repo rate to regulate liquidity. Raising the repo rate helps control inflation and restrict borrowing, while lowering it lets more money into the market, thereby supporting economic growth.
Current Scenario: As of December 2023, the repo rate is 6.5%, which is a result of RBI’s strategic adjustment to accommodate the economic situation. Changes in the repo rate have a cascading effect on the interest rates on loans and various financial instruments.
Reverse Repo Rate
Definition: The reverse repo rate is the interest rate at which the central bank pays commercial banks to deposit their excess funds. This is less than the repo rate.
Purpose: Used to control cash flow, especially during inflation. Increasing the reverse repo rate encourages banks to deposit additional funds in the central bank by absorbing additional funds from the market.
Interconnection: The interconnection between the repo rate and the reverse repo rate is important for maintaining a balanced money market.
SLR and CRR
SLR (Statutory Liquidity Ratio): It is mandatory for banks to maintain a percentage of deposits in liquid assets. Adjusted by RBI to regulate inflation and cash flow.
CRR (Cash Reserve Ratio): A portion of total deposits held as liquid cash with the central bank. It ensures that banks have enough cash for depositors.
MSF Rate
Definition: Marginal Standing Facility Rate is the interest rate charged by RBI for overnight lending by scheduled commercial banks.
Objective: MSF helps banks access immediate funds when inter-bank liquidity dries up. This rate is about 1 percent more than the repo rate.
Impact on Retail Loans: Changes in MSF rate may impact retail loan rates. Cheaper MSF rates could result in lower borrowing costs for the public.