RBI keeps repo rate unchanged at 6.5% for 10th time in row

Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI)on Wednesday chose to leave the repo rate, the rate at which it lends
to commercial banks, unchanged at 6.5 per cent marking the tenth consecutive time the rate has remained steady. Interestingly, the policy stance has been shifted to neutral from 'withdrawal of accommodation' signaling the central bank's readiness to ease monetarypolicy if inflation continues its downward trajectory. A status quo in repo rate means that all external benchmark lending rates (EBLR) that are linked to the repo rate will remain unchanged providing relief to borrowers.

While maintaining the retail inflation estimate for FY25 at 4.5 per cent (though it altered the quarterly projections), the RBI governor Shaktikanta Das warned, “We have to be very careful about opening the gate, as the inflation horse may bolt again.”

The RBI has projected inflation at 4.8 per cent for Q3 which is the highest for the four quarters this year. Das highlighted three major risks to inflation--weather, geo-politics and global commodity prices.
Importantly, despite RBI’s own estimates for Q1 FY25 GDP growth being missed on the lower side, the full year GDP estimate has been retained at 7.2 per cent.

The MPC decision on stance change was unanimous whereas one-member Nagesh Kumar (out of six members) had voted for a 25-bps rate cut.

On a question on high interest rates impacting growth, Das said that elevated interest rate is not impacting growth and economic activities are well sustained. “At the moment, we don't see any evidence of higher interest rate impinging on growth. Growth continues to be very robust. Investment intentions are quite visible.”

“High rates have been there for more than one and half years now...(but) growth is holding firm and steady,” he said.

Das said that a slew of factors including consumption and investment activity make the RBI go towards the 7.2 per cent economic growth forecast.

India's GDP expanded by 8.2 per cent in FY24. The first quarter growth decelerated to a 15-quarter low of 6.7 per cent, leading to economists pegging their estimate between 6.5-7 per cent for FY25.

He said the growth in the first quarter would have come at above 7 per cent if one were to account for the higher subsidy outgo from state governments which drags down the overall growth.

DK Joshi, chief economist at Crisil Ltd said, “We anticipate a 25-basis-point reduction in the repo rate during the MPC’s policy review meeting in December, given food inflation is expected to ease after a healthy monsoon. We also expect gross domestic product (GDP) growth to moderate to 6.8 per cent this fiscal compared with RBI’s forecast of 7.2 per cent.”
The RBI has maintained a status quo on benchmark interest rates since April 2023. The last hike in policy rate was done in February 2023 by 25 basis points to 6.5 per cent in February 2023.

Meanwhile, the RBI announced a host of customer centric measures such as increasing the per transaction limits for UPI123, UPI Lite wallet limit and doing away with foreclosure charges or pre-payment penalties on floating rate term loans to MSMEs.