The Reserve Bank of India (RBI) on Thursday decided to keep the repo rate unchanged at 6.50% in its monetary policy committee (MPC) meeting despite an uptick in inflation, surprising most analysts. Governor Shaktikanta Das, however, said the war against inflation wasn’t over.
The central bank had raised the key lending rate by 250 basis points since the beginning of the cycle in May 2022 and most economists were expecting a 25 basis points hike in what was the first meet of the rate-setting panel in the 2023-24 fiscal year. One basis point is one hundredth of a percentage point.
“While we have kept the policy rate unchanged, this decision was taken based on our assessment of the macroeconomic and financial conditions with reference to information available up to today,” governor Das said.
“Our job is not yet finished and the war against inflation has to continue until durable decline in inflation closer to target is seen.” Das said the decision to pause the rate hike was “for this meeting only”, signalling that the RBI does not rule out future hikes.
The MPC has three members from the central bank and three external members. Thursday’s decision to hit the pause on rates was unanimous.
Among key projections, the central bank has projected the country’s real (inflation adjusted) GDP growth at 6.5% in 2023-24. Retail inflation is seen at 5.2% in 2023-24.
Central banks typically raise the repo rate – the interest rate at which commercial banks borrow money by selling their securities to the Reserve Bank – to shrink money supply in the economy.
Lower interest rates make for easy borrowing and businesses typically borrow to invest in new economic activities. Therefore, more cash supply increases inflation because more money chases fewer goods. Money supply can be increased overnight, but not purchasable goods, which need considerable time to produce.
On the other hand, at times of high inflation, central banks typically increase interest rates to shrink money supply and cool inflation.
Following the pause, the standing deposit facility rate, pegged 25 basis points below the repo rate, is at 6.25%. The marginal standing facility rate, which is 25 bps above the repo rate, remains at 6.75%.
The MPC had first raised rates by 40 basis points at an unscheduled meeting in May 2022, followed by 50 basis points each in June, August and September. It raised rates again by 35 basis points in December 2022, followed by a hike of 25 basis points in February 2023.
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