RBI Monetary Policy, RBI keeps repo rate unchanged at 6.5%

The Monetary Policy Committee (MPC) of the Reserve Bank Of India (RBI) has decided to keep the repo rate unchanged at 6.5. 

• This marks the eighth consecutive time the rate has been maintained.

Reasons for RBI Keeps Repo Rate Unchanged

• Inflation Concerns: 
  • Despite some moderation, food inflation remains high due to price pressures on vegetables, pulses, cereals, and spices.
  • Potential future disruptions from adverse weather events add uncertainty to the food inflation trajectory.
  • Volatility in crude oil prices, financial markets, and non-energy commodity prices could lead to higher inflation.
    • The RBI prioritizes achieving the medium-term inflation target of 4% while supporting economic growth.

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• Balancing Growth and Inflation
  • The MPC revised the GDP Growth forecast to 7.2% for 2024-2025, indicating a positive economic outlook.
  • Reasons for rise in GDP growth forecast
    • Positive Domestic Indicators
      • High-frequency domestic activity indicators show resilience in 2024-25, suggesting strong internal economic momentum.
    • Strong Agricultural Outlook
      • The expectation of an above-normal southwest monsoon bodes well for agriculture, a key driver of rural demand. 
        • This will likely boost economic activity.
    • Policy Stance: In response to the above-expected event, the committee remains focused on withdrawing accommodation to manage inflation.
      • Inflation Target: It aims to achieve a medium-term CPI inflation target of 4%, within a band of +/- 2%.
  • The outcome of changing the repo rate: Maintaining a neutral stance could risk reigniting inflation while lowering rates could hinder growth momentum.

Status of Inflation Over a Period ( 2024)

• Recent Trends
  • Decrease in inflation: Inflation has shown a slight moderation since February 2024, dropping from 5.1% to 4.8% in April 2024.
    • However, this decrease is narrow, and food inflation remains high due to price pressures on vegetables, pulses, cereals, and spices.

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Current Major Risks of Inflation

• Persistent Food Inflation
  • Food inflation remains high despite a slight moderation in inflation, driven by rising prices of vegetables, pulses, cereals, and spices.
  • Adverse weather events are expected to continue to disrupt food production and put pressure on food prices in the future.
• Other Upward Pressures
• • Volatility in crude oil prices and financial markets could lead to higher inflation.
  • Rising prices of non-energy commodities also pose an upside risk to inflation.

About Repo rate 

Repo rate stands for “Repurchasing option rate.”

• It is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks and lending institutions.
• Impact of Rate Changes:
  • Increased Repo Rate: This makes borrowing costlier for banks, who pass on the higher costs to customers, making loans more expensive.
  • Decreased Repo Rate: Lowers borrowing costs for banks, increases the availability of funds, and boosts consumer demand.
• Role of the Repo Rate
  • Monetary Tool: Used to control inflation or stimulate demand.
  • Influence: It affects interest rates on all types of loans, including personal, car, housing, and working capital loans.
• How the Repo Rate Works
  • Mechanism: Commercial banks borrow money from the RBI by selling their securities and agreeing to repurchase them at a later date at the repo rate.
  • Economic Impact: Influences overall interest rates in the economy, affecting borrowing costs, inflation, and economic growth.
  • Policy Regulation: Adjustments to the repo rate help regulate Monetary Policy.

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