Context

In the first RBI Monetary Policy Committee (MPC) announcement of the Financial Year 2024-25 (FY25), RBI Governor Shaktikanta Das has decided to keep the repo rate at 6.5%.

RBI Maintains Status Quo, Keeps Repo Rate Unchanged

• It is the seventh consecutive time that the repo rate has remained unchanged.
• The decision aims to contract inflation to meet the central bank’s 4% target, with a focus on stable growth.
• The RBI Monetary Policy Committee (MPC) has chosen to maintain its position of “reducing stimulus measures” unchanged, with a majority decision of 5-1.
• The RBI has kept the retail inflation target for FY25 at 4.5%, supported by inflation within the 2-6% band.
• In February, the consumer price index (CPI) recorded retail inflation at 5.09%.

Reasons to Keep Repo Rate Unchanged

• Inflation is still above target: While inflation has remained within the target range for the past 6 months (at 5.09% in February), it’s still higher than the RBI’s target of 4%. 
• Food price uncertainty: The RBI is concerned about potential future increases in food prices, which could push inflation back up as war in Ukraine has affected global grain markets and edible oil prices.
• Supporting economic growth: The Indian economy is growing at a healthy pace (7.6% estimated for FY24), and the RBI wants to maintain this momentum by keeping interest rates stable.
• Global economic slowdown: The RBI is cautious about the slowing global trade outlook, which could impact the Indian economy. Thus, it has taken such measures for the following reasons. 
  • Stability in Interest Rates: The RBI wants to keep interest rates steady to control inflation and keep the value of the Indian rupee stable. 
    • This helps make Indian goods cheaper for foreign buyers, boosting exports.
  • Encouraging Domestic Investment: By keeping interest rates steady, the RBI hopes to encourage Indian businesses to invest more. 
    • This helps grow the economy within India itself, reducing the need to rely too much on selling goods abroad.
• Persistent inflation in developed economies: They’re concerned that inflation might remain high in developed countries, which could put upward pressure on global prices.
• Monetary transmission: The RBI wants to ensure that changes in repo rate are effectively reflected in lending rates by banks.

What is the Repo Rate?

• Definition: Repo rate is the interest rate at which the central bank lends money to commercial banks.
• Regulating Liquidity: The Reserve Bank of India (RBI) uses the repo rate to manage liquidity in the economy.
• Banking Connection: Repo rate is associated with ‘repurchase options’ or ‘repurchase agreements’ in banking.
• Borrowing from the Central Bank: During fund shortages, commercial banks borrow from the central bank at the repo rate.
• • Secured Loans: Central bank provides short-term loans against securities like treasury bills or government bonds.
• Monetary Policy Tool: Repo rate adjustments are used by the central bank to control inflation and enhance bank liquidity.
• Rate Changes Impact: An increase in repo rate aims to control prices and borrowing, while a decrease stimulates economic growth.
  • Changes in repo rate affect public borrowings, including home loans and EMIs.
  • Unchanged repo rate typically shows steady interest rates on loans offered to consumers and businesses.
• Financial Implications: Various financial and investment instruments, from loan interest rates to deposit returns, are indirectly influenced by repo rate adjustments.