RBI Maintains Repo Rate At 6.5% Amid Balancing Act Between Growth & Inflation

In a move to sustain economic growth while keeping inflation in check, the Reserve Bank of India (RBI) opted to maintain the key policy repo rate at 6.5% during its meeting on Thursday.

The rate has remained steady for the ninth consecutive session.

RBI Governor Shaktikanta Das announced that the Monetary Policy Committee (MPC) voted 4:2 in favor of keeping the repo rate unchanged, citing the rise in inflation to above 5%, which remains higher than the target level of 4%.

RBI Governor stated, “Inflation, after easing to 4.8% in April and May, has risen to 5.1% in June, driven by persistently high food prices.”

He emphasized the need to maintain a disinflationary stance, noting that price stability is essential for sustaining growth.

Despite the current inflationary pressures, Das expressed optimism that the inflation rate would decline in the third quarter of the current financial year.

He highlighted that domestic growth remains resilient, bolstered by steady urban consumption.

The MPC emphasized the need for consistent monetary policy while closely monitoring inflation, with a primary focus on maintaining economic stability.

RBI Governor also noted that there is alignment between the RBI’s monetary policy decision and market expectations.

Central Bank Continues Withdrawal Of Accommodation To Support Growth & Job Creation

The central bank decided to continue with its withdrawal of accommodation stance, aimed at managing liquidity to support economic growth and job creation.

He remarked, “While inflation is gradually receding globally, medium-term global growth faces significant challenges. Nonetheless, domestic economic activity remains robust, with manufacturing gaining momentum due to increasing demand.”

The last rate adjustment by the RBI occurred in February 2023, when the repo rate was increased to 6.5%.

Between May 2022 and February 2023, the RBI raised rates by 2.5% before deciding to hold them steady to support economic growth despite ongoing inflationary pressures.

The repo rate, which is the interest rate at which the RBI lends short-term funds to banks, significantly impacts the cost of loans extended to corporates and consumers.

A reduction in interest rates typically spurs investment and consumption expenditure, driving economic growth but also increasing the inflation rate due to higher aggregate demand.

India’s annual retail inflation eased to 4.83% in April but remains above the RBI’s medium-term target of 4%.

The robust growth rate of 8.2% for the fiscal year 2023-24 provides the RBI with some leeway to delay an interest rate cut until inflation stabilizes at the desired level, according to economists.

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