RBI Maintains Repo Rate at 6.5% for the 10th Time: Impact on Your Loan EMI and What It Means for Borrowers in 2024
The Reserve Bank of India (RBI) has once again made no changes to the interest rates for the 10th consecutive time. The RBI has maintained the interest rate at 6.5%, meaning loans will not become more expensive, and your EMI (Equated Monthly Installment) will not increase either.
The last time the RBI adjusted the interest rate was in February 2023, when it increased the rate by 0.25%, bringing it to 6.5%.
RBI Governor Shaktikanta Das provided updates on the decisions made during the ongoing Monetary Policy Committee (MPC) meeting, which started on October 7th (Wednesday).
This meeting is held every two months. In the previous meeting held in August, the RBI had also decided to keep the interest rates unchanged.
US Federal Reserve Reduces Interest Rates by 0.5%
On September 18, the US Federal Reserve lowered interest rates by 0.5%. This reduction, made after four years, has brought the interest rates to a range between 4.75% and 5.25%.
As the United States is the world’s largest economy, every significant decision made by its central bank has an impact on economies across the globe.
RBI Increased Interest Rates by 1.10% Five Times Since 2020
Since the onset of the COVID-19 pandemic, the Reserve Bank of India (RBI) reduced interest rates twice by 0.40%, between March 27, 2020, and October 9, 2020.
Following these reductions, in the next 10 meetings, the central bank increased the interest rates five times, made no changes four times, and once, in August 2022, decreased the rate by 0.50%. Before the COVID pandemic, the repo rate stood at 5.15% as of February 6, 2020.
GDP Growth Estimate for FY25 Remains Steady at 7.2%
The GDP growth estimate for FY25 has been kept steady at 7.2%. Here’s a comparison of the previous and current projections:
| Quarter | Previous Estimate | Current Estimate |
|---|---|---|
| Q1 FY25 | 7.3% | 6.7% |
| Q2 FY25 | 7.2% | 7.0% |
| Q3 FY25 | 7.3% | 7.4% |
| Q4 FY25 | 7.2% | 7.4% |
Inflation Estimate for FY25 Remains Steady at 4.5%
The inflation estimate for FY25 has been kept unchanged at 4.5%. Below is a comparison of the previous and current projections:
| Quarter | Previous Estimate | Current Estimate |
|---|---|---|
| Q2 FY25 | 4.4% | 4.1% |
| Q3 FY25 | 4.7% | 4.8% |
| Q4 FY25 | 4.3% | 4.2% |
| Q1 FY26 | 4.4% | 4.3% |
India Could See a 0.50% Rate Cut by March 2025
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Financial Services, has predicted a potential rate cut of 0.50% in India by March 2025. The Reserve Bank of India (RBI) has not made any changes to the interest rates since February 8, 2023, with the current repo rate standing at 6.50%.
Vijay Bharadia, founder of Wolforth Financial Services Limited, mentioned that a rate cut would be a bold move, encouraging the RBI and other global central banks to adopt a more accommodative monetary stance.
Policy Rate: A Powerful Tool to Combat Inflation
Every central bank possesses the policy rate as a powerful tool to fight inflation. When inflation rises, the central bank increases the policy rate to reduce the money supply in the economy.
If the policy rate remains high, loans that banks take from the central bank become more expensive. In turn, banks pass this cost onto their customers, making loans more expensive. This reduces the flow of money in the economy, which lowers demand and, consequently, inflation.
Similarly, when the economy goes through a downturn, it requires an increased flow of money for recovery. In such cases, the central bank lowers the policy rate, making loans cheaper for banks and, in turn, for customers, stimulating economic activity.
Understanding the Inflation Statistics
Retail Inflation at 5.08% in August
According to the retail inflation statistics released on September 12, retail inflation rose to 5.08% in August, up from 3.54% in July. The increase in retail inflation was primarily driven by rising vegetable prices. The Reserve Bank of India (RBI) targets an inflation range of 2% to 6%.
Wholesale Inflation at 3.36% in June
In June, wholesale inflation reached a 16-month high of 3.36%, as reported on July 15. This figure is up from 3.85% in February 2023. Food inflation increased from 7.40% in May to 8.68% in June.
However, due to a decrease in the prices of essential commodities, wholesale inflation fell to 1.31% in August, marking its lowest level in four months, compared to 1.26% in April. Just a month earlier, in July, wholesale inflation had decreased to 2.04%.
How Inflation Affects Purchasing Power
Inflation has a direct impact on purchasing power. For example, if the inflation rate is 7%, the value of ₹100 earned would effectively be reduced to just ₹93 in terms of purchasing power.
This means that to maintain the value of your money, it is crucial to invest with inflation in mind. Otherwise, the value of your money will decrease over time, leading to a decline in your ability to purchase goods and services.
