The policy repo rate unchanged for the ninth time in a row
Context
The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to maintain the policy repo rate at 6.50% for the ninth time in a row. This decision is significant as it directly impacts inflation and economic growth, both of which are crucial for maintaining economic stability in the country.
Relevance:
GS-03 (Economy)
Key Highlights:
- Policy Repo Rate Unchanged: The RBI’s MPC has kept the policy repo rate at 6.50%, marking the ninth consecutive time that the rate remains unchanged. This decision was supported by four out of six members of the MPC.
- Impact on Other Rates: As a result of this decision, the standing deposit facility rate stays at 6.25%, and both the marginal standing facility rate and the bank rate are maintained at 6.75%.
- Focus on Inflation: The MPC continues to focus on withdrawing monetary accommodation to control inflation, aiming to align it with the target while also supporting economic growth. The decision to maintain the current rates was driven by the need to manage inflation, which saw a slight increase to 5.1% in June 2024, primarily due to persistent food inflation.
- Inflation Trends: RBI Governor Shaktikanta Das highlighted that while core inflation (excluding food and fuel) has moderated, the pace of disinflation is slow and uneven. The MPC considers it essential to maintain its current monetary stance while keeping a close watch on inflation trends.
- Economic Growth Projections: The MPC has projected real GDP growth for 2024-25 at 7.2%. The growth projections for the first quarter of 2024-25 are at 7.1%, with subsequent quarters expected to grow between 7.2% and 7.3%. For the first quarter of 2025-26, the growth is projected at 7.2%.
- Inflation Projections: Assuming normal monsoon conditions, the Consumer Price Index (CPI) inflation for 2024-25 is projected at 4.5%. The projections for the subsequent quarters of 2024-25 range between 4.3% and 4.7%. The risks to these projections are considered balanced.
What is Repo Rate?
- The repo rate is the interest rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.
- It is a crucial tool used by the RBI to control inflation and regulate the supply of money in the economy.
- When the RBI wants to make it more expensive for banks to borrow money, it increases the repo rate, thereby reducing the money supply in the economy.
- Conversely, a decrease in the repo rate makes borrowing cheaper, leading to an increase in the money supply.
Its Effects in the Economy
- Inflation Control: By adjusting the repo rate, the RBI can control inflation. When the repo rate is high, borrowing costs for businesses and consumers increase, leading to a reduction in spending and investment, which in turn helps in reducing inflation. On the other hand, a lower repo rate can stimulate spending and investment, which can lead to higher inflation if not controlled.
- Economic Growth: The repo rate also influences economic growth. A lower repo rate can boost economic activity by making loans cheaper for businesses and consumers, leading to increased spending and investment. This can stimulate economic growth. However, if the economy overheats, leading to high inflation, the RBI may raise the repo rate to cool down the economy.
- Loan and Deposit Rates: The repo rate directly affects the interest rates on loans and deposits. When the repo rate is increased, banks raise their loan and deposit rates, making loans more expensive and deposits more attractive. Conversely, a decrease in the repo rate leads to lower loan rates, making borrowing cheaper and stimulating economic activity.
- Exchange Rates and Foreign Investment: Changes in the repo rate can also influence exchange rates and foreign investment. A higher repo rate can attract foreign investors looking for better returns, leading to an appreciation of the domestic currency. Conversely, a lower repo rate may lead to a depreciation of the currency as investors seek higher returns elsewhere.
Why Has MPC Kept It Unchanged?
The decision by the MPC to keep the repo rate unchanged at 6.50% is primarily driven by the need to manage inflation while supporting economic growth. Here are the key reasons:
- Inflation Concerns: Although inflation has shown some signs of moderation, it remains a concern for the MPC. The headline inflation rate increased slightly to 5.1% in June 2024, mainly due to persistent food inflation. The MPC believes that it is important to maintain the current monetary stance to ensure that inflation continues to align with the target.
- Uneven Disinflation: The pace of disinflation, or the process of reducing inflation, has been slow and uneven. Core inflation, which excludes food and fuel, has moderated, but the overall inflation rate is still above the desired level. The MPC, therefore, judged it necessary to continue with the current policy to bring inflation down to the target level.
- Balancing Growth and Inflation: The MPC is also mindful of the need to support economic growth. By keeping the repo rate unchanged, the committee aims to strike a balance between controlling inflation and fostering economic growth. The projected GDP growth rate of 7.2% for 2024-25 indicates a positive outlook, but this growth needs to be sustained in a stable inflation environment.
- Monitoring Inflation Risks: The MPC has emphasized the importance of closely monitoring the inflation trajectory and its associated risks. The decision to maintain the current repo rate reflects a cautious approach, with the MPC keeping a close vigil on inflationary pressures and being prepared to take further action if necessary.
Conclusion:
In summary, the MPC’s decision to keep the repo rate unchanged is a deliberate move to manage inflation while ensuring that the economy continues to grow at a healthy pace. The committee remains vigilant and ready to make further adjustments as required by the evolving economic conditions.
