MPC hits pause button for 4th time

Mumbai: As widely expected, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday unanimously decided to keep the repo rate (benchmark rate at which the RBI lends to commercial banks) unchanged for the fourth consecutive time at 6.5 per cent on Friday.

The committee also voted, with a 5-1 majority, to keep the ‘withdrawal of accommodation’ stance on the rationale that transmission of the past rate hikes to banks lending and deposit rates is still incomplete.

“Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent in this meeting,” the RBI governor Shaktikanta Das said in his statement.

One basis point (bps) is one hundredth of a percentage point.

Even though the RBI has hiked the repo rate by 250 bps since May 2022, the weighted average lending rate of scheduled commercial banks have risen by 108 basis point and 196 basis points for outstanding and fresh loan.

Notably, the rate-setting panel flagged high inflation as a major risk to macroeconomic stability and sustainable growth. Das emphatically reiterated that the inflation target is 4 per cent and nor 2 per cent to 6 per cent. He said that the inflation outlook was clouded by uncertainty following uneven kharif sowing and volatile global food and energy prices.

 The MPC kept both growth and inflation forecasts for the current fiscal at 6.5 per cent and 5.4 per cent, respectively.

 He also announced that the RBI will be nimble in managing liquidity by conducting open market operations (OMO) sales which spooked the bond markets and the benchmark 10 year treasury yield rose 14 bps to 7.35 per cent. OMO is a term which refers to the purchase or sale of government securities in the open market by the central bank. OMO sales are negative for bond yields because the RBI’s sale of bonds in the open market will lead to a fall in prices of bonds and increase in yields.

DK Joshi, chief economist at Crisil said, “We foresee a rate cut only in the first quarter of next fiscal, assuming normalising inflation and slowing growth. Uneven distribution of rainfall during the monsoon season, rising crude oil prices and tight global food supplies continue to pose upside risks to inflation this fiscal.”

Real estate experts said that a status quo on rates would help in continuing the momentum in housing sales amid the ongoing festive season. Shishir Baijal, Chairman & Managing Director, Knight Frank India “The decision will continue to maintain the existing momentum of residential real estate demand in India. Since the interest rate upcycle, the repo rate has been hiked by 250bps, resulting in 160bps rise in home loan rates. Since then, although the overall housing demand has remained upbeat, the lower housing segment or the affordable housing demand has witnessed a deceleration due to a substantial rise in the borrowing costs and other challenges. The stance today should be considered as a big relief for the housing sector of the country which has shown tremendous strength in the face of headwinds over the last year.”