MPC Keeps Repo Rate Unchanged At 6.5%, Stance Unchanged

Since October 1, 2019, banks have linked floating-rate retail loans to an external benchmark, which is the repo rate in most cases. Any
changes in the repo rate directly influence the interest rates on these loans.

The policy estimated a strong revision in real GDP growth for FY 25 to 7 per cent from 6.5 per cent in the previous policy. While FY 25 inflation forecast is at 4.5 per cent, the RBI Governor Shaktikanta Das said that the last mile walk is very crucial, hence the walk towards headline CPI of 4 per cent is key for RBI.

Das also nudged banks to push up the lending rates because inflation is well beyond the central bank's comfort zone and may remain so through the whole of 2024.

While the RBI has increased rates by 250 basis points between May 2022 and February 2023, Das rued the fact that lending rates in the credit market have not increased proportionately. When interest rates rise, people borrow less and spend less, keeping prices in check.

Governor Das remembered Mahatma Gandhi while speaking about RBI’s 4 per cent inflation target, which still remains a distant dream.

“I am moving cautiously, watching myself at every step.. but there is the fixed determination behind every act of mine,” Governor Shaktikanta Das said quoting words of Mahatma Gandhi.

“Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 bps policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent. The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation,” Das said in his statement.

“Monetary policy must continue to be actively disinflationary to align inflation to the target of 4 per cent on a durable basis. The MPC will remain resolute in this commitment. The MPC also decided to remain focused on withdrawal of accommodation to ensure fuller transmission and anchoring of inflation expectations,” added the governor.

India's annual retail inflation increased to 5.69 per cent in December from 5.55 per cent in November. Although headline inflation has come within the 2-6 per cent band, it still remains above the 4 per cent target for the RBI.

The RBI hiked policy rates by 250 basis points between May 2022 and February 2023, since then it has kept the repo rate unchanged at 6.5 per cent.

Meanwhile, analysts now expect the central bank to cut rates not before June 2024.

The RBI also asked banks to provide retail and MSME borrowers with a Key Fact Statement about the terms of the loan agreement, including
all inclusive interest cost. It unveiled a framework for authenticating digital payment transactions and announced its decision to review the framework for electronic trading platforms in response to requests from market makers. It also announced plans to introduce an offline functionality in CBDC retail transactions in areas with poor or limited internet connectivity.

On the restrictions imposed on Paytm Payments Bank, Das said that its supervisory action and its restrictions are proportionate to the gravity of the situation. He clarified that the RBI had been engaged with Paytm for quite some time and all the regulatory actions are in the best interest of systemic stability and customers.