Repo rate is the rate at which the RBI lends to other banks.
The RBI’s decision to not raise repo rate and keep it at 6.5% is set to provide relief to borrowers. The home loan and other EMIs are not likely to rise in near future. Most analysts had expected one final hike of 25 basis points in the RBI’s current tightening cycle, which has seen it raise the repo rate by a total of 250 bps since May last year.
The Reserve Bank of India said it stood ready to act against inflation if conditions warranted, with governor Shaktikanta Das saying the decision to pause was “for this meeting only”, signalling further rate hikes were still possible.
The RBI has marginally raised the GDP growth projection for FY24 to 6.5% from earlier estimate of 6.4%, Das said.
This was the first meeting of the RBI’s MPC in the new financial year.
Bid to tame inflation
The central bank has already increased repo rate by a total of 250 basis points since May in a bid to contain inflation, though it has continued to remain above the RBI’s comfort zone of 6 per cent most of the time.
Having remained below six per cent for two months (November and December 2022), the retail inflation breached the RBI’s comfort zone in January, warranting action by the central bank.
The Consumer Price Index (CPI)-based inflation was 6.52 per cent in January and 6.44 per cent in February.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
The RBI has been tasked to ensure that retail inflation remains at 4 per cent with a margin of +/-2 per cent. However, it failed to keep inflation rate below six per cent for three consecutive quarters beginning January 2022.
The MPC consists of three RBI officials and three external members appointed by the central government.
The external members are Shashanka Bhide (Honorary Senior Advisor, National Council of Applied Economic Research, Delhi); Ashima Goyal (Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai); and Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad).
(With inputs from agencies)