RBI keeps repo rate unchanged at 6.5% for ninth time in a row

The six-member Monetary Policy Committee (MPC) of the RBI has kept the repo rate unchanged for the ninth time amid risks from higher food inflation.

The MPC also continued with the monetary policy stance of withdrawal of accommodation, while four out of six MPC members voted in favour of the rate decision.

"We are seeing good convergence between market expectations and RBI policies, they are well aligned," RBI governor Shaktikanta Das said.

The central bank had last cut the repo rate by 40 basis points to 4 percent in May 2020 when the Covid pandemic raged across the country affecting the entire economy, leading to slowdown in demand, production cuts and job losses, according to reports.

Since then, the apex bank has hiked the repo rate by 250 points to 6.50 percent in order to tackle high inflation level after the pandemic subsided.

Shaktikanda Das said, while announcing the decision, that inflation broadly has been on a declining trajectory.

With RBI leaving the repo rate unchanged at 6.5 percent, all external benchmark lending rates (EBLR) that are linked to the repo rate will not increase, giving relief to borrowers as their equated monthly instalments (EMIs) will not rise.

Lenders, however, are likely to raise interest rates on loans that are linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250 bps hike in the repo rate between May 2022 and February 2023 has not happened, reports The Indian Express.

In response to the 250 bps policy rate hike since May 2022, lenders have revised their repo-linked EBLRs upwards, and the one-year median marginal cost of funds-based rate (MCLR) of banks raised to 168 bps during May 2022–June 2024, as per reports.

Meanwhile, RBI governor Shaktikanta Das said that Consumer Price Index (CPI) inflation for FY25 is projected at 4.5 percent, while CPI inflation is pegged at 4.9 percent for Q1FY25, 4.4 percent for Q2FY25, 4.7 percent for Q3FY25, and 4.3 percent for Q4FY25.

The CPI inflation for 2025-26 is projected at 4.4 percent, while adding that risks are evenly balanced, said Das, adding that in Q3, substantial advantage of base effect may pull down the overall inflation.

"Inflation across the globe is receding grudgingly," stated Governor Das.

"Policies are showing signs of divergence across geographies. Many central banks are moving toward policy pivots, while some have tightened rates as well," Das added.

He mentioned that after remaining steady in April at 4.8 percent, headline inflation went up to 5.1 percent in June this year (2024) due to higher-than-expected food inflation.

The RBI governor added that inflation in the country is broadly on a declining trajectory, while the softening in core inflation continues to be broad based, given the decline in core services inflation in May and June.

Tariff hikes by major telcos will also put pressure on core inflation, Das said.

Shaktikanta Das also reiterated the RBI's focus on keeping inflation levels below the 4 percent threshold.

While overall inflation trajectory is moderating, the RBI is likely to observe continued moderation and be watchful, he said.

Food component of inflation, which has a 46 percent weight on headline inflation, remains stubborn, while food inflation went up from 8.69 percent in May to 9.55 percent in June, with vegetable prices going up 27.33 percent, said Das, adding that high food prices slowed the process of disinflation in Q1FY25.

Meanwhile, the central bank said that the net Foreign Direct Investment (FDI) inflows doubled in the April to June 2024 quarter compared to the previous year, while India's foreign exchange reserves reached a record $675 billion as of August 2, 2024.

The apex bank's two-way Liquidity Adjustment Facility (LAF) operations in June and July aligned overnight rates with the repo rate, according to reports.

The RBI governor said the Marginal Standing Facility (MSF) and Standard Deposit Facility (SDF) rates remain steady at 6.75 percent and 6.25 percent, respectively.

After the RBI announced the bi-monthly monetary policy statement, keeping the repo rate steady at 6.5 percent, the equity benchmark indices BSE Sensex and NSE Nifty continued to trade lower on Thursday.

In the early trade on Thursday, the S&P BSE Sensex had dropped 0.38 percent to 79,161.1, and NSE Nifty 50 was down 0.4 percent at 24,199.9.

Both benchmark indices were down about 0.3 percent ahead of the announcement of RBI's decision, and the indexes extended losses to about 0.6 percent immediately after the policy announcement, before trimming some losses, according to reports.

Reacting to the RBI's monetary policy, Vaidyanathan Srinivasan, Operating Partner – Essar Capital, said, "The Reserve Bank of India’s Monetary Policy Committee has opted to maintain the repo rate at 6.5 percent for the ninth consecutive meeting, emphasising its dedication to economic stability amidst ongoing inflationary pressures."

"This decision, reached by a 4:2 majority, reflects a strategy that balances the necessity for growth with the imperative of price stability," Srinivasan said. "The RBI’s cautious stance acknowledges the fragile economic environment, emphasising the importance of fostering growth initiatives while keeping inflation in check."

"These measures are crucial for instilling confidence among investors and consumers as the central bank navigates a complex economic landscape,” he added.