Monetary Policy Review: Repo Rate Unchanged

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.

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.

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