AIR Spotlight: Monetary Policy Committee Decision to Keep the Repo Rate Unchanged

AIR Spotlight is an insightful program featured daily on the All India Radio News on air. In this program, many eminent panellists discuss issues of importance which can be quite helpful in IAS exam preparation.

This article is about the discussion on: RBI Monetary Policy Committee  decision to keep the Repo Rate unchanged.

Participants

• K.A. Badrinath: Economic Analyst.
• Rajesh Lekh: AIR Correspondent.

Context – The Monetary Policy Committee has decided unanimously to keep the repo rate unchanged at 6.5%. Also, the Standing Deposit Facility (SDF) rate will remain unchanged at 6.25% and the Marginal Standing Facility (MSF) rate and the Bank Rate at 6.75%.

Introduction – 

Monetary policy refers to the policy of the central bank RBI  with regard to the use of monetary instruments under its control to  regulate magnitudes such as interest rates, money supply and availability of credit. The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth.

• The Monetary Policy Committee (MPC) is an empowered six-member body under the Reserve Bank of India (RBI) Act, 1934 (as amended in 2016). 
• The MPC’s primary responsibility is to conduct monetary policy in India with the objective of maintaining price stability while considering the growth objective. It is chaired by the governor of the RBI.

Repo-Rate remains unchanged at 6.5%

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) kept the repo-rate, its key lending rate, unchanged at 6.5 % and maintained its stance on “withdrawal of accommodation”.

• After raising the repo-rate in six consecutive policies , the RBI decided to pause its rate hike cycle amid rising concerns over global financial stability. India’s latest round of monetary tightening has been the most aggressive in a decade.
• The RBI’s MPC has raised the repo rate by 250 bps in the last 11 months, since May 2022.

• The decision to take a pause was unanimously decided by all the six members of MPC even though the inflation continues to remain above the tolerance band of 2-6%.
• The RBI’s decision will give a big relief to borrowers as their lending rates, which are linked to repo rate, will not increase. Simply put, it means that EMI on loans will not rise for the time being.

• • An increase in repo rates in India impacts home buyers by increasing their borrowing costs and reducing affordability. It also impacts the real estate market by reducing demand for housing and potentially lowering housing prices.

• The decision to pause is probably a reflection of the extreme uncertainty which characterises the global economy, and the risks of its potential spillovers into India. 
• However, the hike has not been ruled out in the near future as said by the RBI Governor, Shaktikanta Das that the committee would not hesitate to take action/raise repo rate  as may be required in its future meetings.

Repo Rate /Repurchase Rate-

Repo rate is the interest rate at which RBI lends money to commercial banks. This indirectly affects the interest rates of home loans, car loans etc. 

Global Banking Turbulence-

• Major US banks, such as Silicon Valley Bank  and Signature, and Europe’s Credit Suisse have reported record losses, triggering concerns about an imminent crisis in the banking system. The failure was attributed to poor regulatory oversight, dwindling deposits, and balance-sheet issues.  
• The banking and non-banking financial service sector in India is well funded, stable and does not show any signs of collapse.
• India has robust Asset liability management (ALM) guidelines, strong regulatory frameworks, and government guarantees that will prevent such a crisis.  
• Also , Indian banks and financial institutions have significant capital buffers and provision coverage ratios to tide over the liquidity issues. 

Global Volatility

• Amidst the geopolitical tensions and the volatility in the global financial markets, RBI has projected real GDP growth for 2023-24 at 6.5% with Q1 at 7.8%, Q2 at 6.2%, Q3 at 6.1% and Q4 at 5.9%.
• Taking various factors into account and assuming an annual average crude oil price (Indian basket) of $85 per barrel and a normal monsoon, CPI,consumer price index inflation is projected to moderate to 5.2% for 2023-24, with Q1 at 5.1%, Q2 at 5.4%, Q3 at 5.4% and Q4 at 5.2%. The risks are evenly balanced.      

Read previous AIR Spotlight articles in the link.

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