RBI Maintains Repo Rate Of 6.5% For Third Consecutive Time

In its latest meeting, the Reserve Bank of India's rate-setting panel, led by RBI Governor Shaktikanta Das, decided unanimously to maintain the repo rate at 6.5 per cent for the third consecutive time. This decision was announced after the three-day meeting of the Monetary Policy Committee (MPC). 

Das stated that the MPC's stance is to remain vigilant and assess the ongoing situation. The RBI also upheld its strategy of withdrawing accommodation, with a five-to-one majority vote, in order to ensure that headline inflation stays within the targeted four per cent range. 

Furthermore, the projection for inflation was adjusted upwards from 5.1 per cent to 5.4 per cent due to increasing prices of vegetables, cereals, and pulses. The GDP forecast for the fiscal year 2023-24 was retained at 6.5 per cent, as previously announced in June. In the previous MPC meeting, the committee had anticipated real GDP growth of 8.0 per cent for Q1, 6.5 per cent for Q2, 6.0 per cent for Q3, and 5.7 per cent for Q4. 

Governor Das emphasised the RBI's unwavering commitment to safeguarding the financial system against potential challenges while making these important decisions. The repo rate, a key policy rate used by the RBI for lending to banks, has remained unchanged since its 25 basis points increase in February 2023. No adjustments were made in the subsequent meetings held in April and June. 

Anticipating the 10 August policy meeting, a Reuters poll of 75 economists conducted between 13 and 31 July had already predicted that the central bank would maintain the repo rate at 6.50 per cent. These experts foresaw a continuation of the trend of no rate hikes, with many economists projecting CPI inflation to range between 6 to 6.5 per cent, compared to the June value of 4.81 per cent.  

June's inflation rate had risen to 4.81 per cent, rebounding from a 25-month low of 4.25 per cent in May. With the persistent increase in fruit and vegetable prices, it is expected that inflation will continue to rise. The RBI has been actively increasing rates in order to keep inflation within the tolerance band of 2 to 6 per cent. 

Speaking on the announcement, Indranil Pan, Chief Economist at Yes Bank, commented saying, “There were no surprises in the policy and unlike market expectations, there was no hawkish bend to the commentary. However, as any good central bank would do, the RBI signals that it would continue to look ahead and factor in its anticipated inflation trajectory into future monetary policy decisions. Effectively, the RBI will be looking through the likely spikes in the near term retail inflation as a result of the sharp increases in vegetable prices. The expectation is for such seasonal variations to dissipate with the arrival of the new crop – indicative in the inflation forecast of the RBI. While the RBI has sharply increased the Q2 inflation forecast, the Q4 inflation forecast has remained unchanged. The vigil on inflation would continue to factor in all the moving pieces and the RBI keeps itself open to deploying all instruments that could be necessary to align inflation to the four per cent target.” 

Madan Sabnavis, Chief Economist of Bank of Baroda, spoke on similar grounds stating, “While the RBI has expectedly not changed the repo rate or stance this time, there has been a change in inflation outlook quite significantly. Interestingly the RBI has increased the forecast to 5.4 per cent from 5.1 per cent with the second quarter inflation crossing 6 per cent (6.2 per cent). This is indicative that for the present calendar year, there is no probability of a rate cut as inflation forecast for Q3 is placed at 5.7 per cent. The introduction of an incremental CRR, though on a temporary basis, will impound resources of banks and have an upward impact on market rates. While there will still be surpluses in the market, the concept of impounding of resources will exert upward pressure on sentiment and hence interest rates. We can assume that this will be reversed before the festival/busy season as the RBI could have gone in for OMO to permanently take out liquidity from the system.”