Context: RBI’s Monetary Policy Committee (MPC) has kept the Repo Rate unchanged at 6.5% for 5th time in a row.
RBI keeps the repo rate steady for the 5th time
- The status quo on the repo rate at 6.5 percent by the MPC comes amid rising risks to inflation due to the recent spike in vegetable prices.
- The central bank also retained the stance of the monetary policy as ‘withdrawal of accommodation’.
- ‘Withdrawal of accommodation’ means to reduce the money supply in the system which will rein in inflation further.
- GDP estimates: It revised upwards to 7 percent from 6.5 percent for FY 2024.
- Inflation estimate remained unchanged at 5.4 percent.
About Monetary Policy Committee (MPC)
- About: Led by the RBI Governor, the committee is constituted by the central government under the RBI Act 1934 and consists of 6 members, meeting four times a year.
- Functions: Determining the policy interest rate required to achieve the inflation target of +/- 2-4%.
Know more about the RBI’s Monetary Policy here. |
Why has RBI kept the Repo Rate unchanged?
- Dichotomy between retail and core inflation: while the retail(food) inflation is above the 4 % target and rising the core inflation is easing around 4%. Consumer price-based inflation (CPI) eased to 4.87 percent in October from 5.02 percent in September.
- Food inflationary pressures: recurring and overlapping food price shocks coming from global factors and adverse weather events( el- nino induced rainfall pressures)
- Ensure better transmission of interest rates: transmission of (250 bps hike in Feb 2023) from 6.25 to 6.5 has not happened by the banks till now.
About Repo Rate
- Definition: It is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.
- Repo rate is a tool used by monetary authorities to manage and balance inflation and growth.
- Relation to inflation: The RBI will increase the repo rate in the event of rising inflationary pressures to discourage money supply in the economy and vice-versa
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Practical Implications of MPC Decision
- All external benchmark lending rates that are linked to the repo rate will not rise.
- Interest rates on home, vehicle, personal, and other loans in the banking system will remain unchanged.
- Interest rates on loans and deposits are set to remain unchanged.
- Certain segments of the retail loans are expected to cost more as the RBI recently hiked the risk weights on retail loans.
News source: Indian Express
December 9, 2023
