RBI Keeps Repo Rate at 6.5%, EMI Stability Assured Amid 4-Year Rate Steadiness; 5.4% Inflation Expected

The Reserve Bank of India (RBI) has announced its decision to maintain the prevailing interest rate of 6.5% for the fourth consecutive time. The announcement was made by RBI Governor Shaktikanta Das following the deliberations of the Monetary Policy Committee, which convened on October 4th.

The Reserve Bank of India (RBI) has opted to maintain the repo rate at its current level of 6.50 percent. This decision comes as no surprise to experts, who had anticipated the central bank’s inclination to keep rates unchanged.

In the preceding year, the RBI had taken several measures to address the escalating inflation rate, which had reached its zenith. This included a series of rate hikes to rein in inflationary pressures. The repo rate, which stood at 4 percent in May 2022, was progressively increased to 6.50 percent by February 2023. Subsequently, it has remained unchanged.

In February 2023, the Reserve Bank of India (RBI) raised the repo rate to 6.5 percent, and this rate has remained unchanged since then. The RBI conducts monetary policy meetings every two months to assess and make decisions regarding key interest rates and economic policies.

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The first monetary policy meeting of this financial year took place in April. Notably, during the previous financial year, the repo rate was increased on six occasions, resulting in a cumulative increase of 2.50 percentage points. These rate hikes were implemented as part of the central bank’s strategy to manage inflationary pressures and stabilize the economic environment.

This series of actions taken by the RBI reflects its commitment to maintaining a balanced approach to monetary policy, taking into account both inflation control and economic growth objectives. The decision to keep the repo rate unchanged in the most recent meeting suggests a continued focus on maintaining stability in borrowing costs for businesses and consumers.

The repo rate is a potent instrument in the Reserve Bank of India’s (RBI) toolkit to combat inflation. When inflationary pressures are elevated, the RBI can employ the repo rate as a countermeasure to curtail the infusion of money into the economy. This strategy involves raising the repo rate, and its ramifications extend throughout the financial system.

When the repo rate is elevated, it becomes more costly for commercial banks to borrow funds from the RBI. In essence, this means that banks must pay a higher interest rate on the funds they acquire from the central bank. Consequently, these higher borrowing costs are typically passed on to consumers and businesses in the form of more expensive loans.

During economic downturns or challenging periods such as the one experienced during the COVID-19 pandemic, the Reserve Bank of India (RBI) can employ a strategy of reducing the repo rate to stimulate economic recovery. This approach is aimed at increasing the flow of money within the economy by making borrowing more affordable for banks and, consequently, for consumers and businesses.

Consider the scenario during the COVID-19 pandemic when economic activities came to a halt, leading to a sharp decline in demand. In response to this crisis, the RBI opted to lower the repo rate. When the repo rate is lowered, it becomes cheaper for commercial banks to access funds from the central bank. Banks can then pass on these reduced borrowing costs to their customers by offering loans at lower interest rates.

By reducing interest rates, the RBI encourages borrowing and spending. Businesses can access cheaper credit to invest in expansion and job creation, while consumers are incentivized to make purchases with lower-cost loans. This influx of money into the economy can help jumpstart economic activity, boost demand, and support a recovery phase.

In addition to its monetary policy decisions, the Reserve Bank of India (RBI) also provides crucial insights into the economic landscape by announcing inflation and GDP estimates. These estimations offer valuable guidance for policymakers, businesses, and investors alike.

In the recent meeting, the RBI Governor disclosed the inflation forecast for the fiscal year 2024, which was raised to 5.4% from the previous estimate of 5.1%. This adjustment indicates the central bank’s ongoing concerns and uncertainties regarding inflationary pressures in the economy.

Concurrently, the RBI maintained its real GDP growth estimate for the fiscal year 2024 at 6.5%. Furthermore, it provided an estimate for the real GDP growth in the first quarter of the fiscal year 2025, pegged at 6.6%. These figures serve as crucial indicators of the expected trajectory of economic expansion and development.

Certainly, the inflation statistics for the mentioned period provide valuable insights into the state of price levels in the Indian economy:

1. Retail Inflation in August at 6.83%:

In August, the retail inflation rate decreased to 6.83%, down from the previous month’s figure of 7.44%. This decline in inflation can be attributed to the relatively lower prices of vegetables during this period. However, it is worth noting that the retail inflation rate of 6.83% still remains above the upper tolerance limit set by the Reserve Bank of India (RBI), which is 6%. This indicates that there is continued pressure on consumer prices, which may warrant attention from monetary policymakers.

2. Wholesale Inflation Rate in August at -0.52%:

Wholesale inflation, on the other hand, registered a rate of -0.52% in August, a notable increase from the previous month’s figure of -1.36%. This marks the fifth consecutive month in which wholesale inflation has remained in negative territory, indicating a sustained period of deflationary pressures in the wholesale market. Additionally, food items experienced a decline in prices during August, with food inflation dropping from 7.75% to 5.62%. This decline in wholesale food prices can be seen as a positive development for consumers as it contributes to lower overall price levels.

Inflation indeed has a significant impact on individuals, businesses, and the overall economy. Here are some key ways in which inflation affects various aspects of economic life:

1. Purchasing Power Erosion: As you mentioned, inflation reduces the purchasing power of money. When the inflation rate exceeds the rate of return on savings or investments, the real value of money declines. This means that with the same amount of money, you can buy fewer goods and services over time. For savers and fixed-income earners, this can be particularly detrimental as their savings lose value in real terms.
2. Cost of Living: Rising inflation can increase the cost of living. Prices of everyday goods and services, such as food, housing, healthcare, and transportation, tend to rise during periods of inflation. This can lead to a higher cost of maintaining a standard of living, impacting household budgets and quality of life.
3. Interest Rates: Central banks, like the Reserve Bank of India (RBI), may adjust interest rates in response to inflation. When inflation is high, central banks may raise interest rates to control it. This, in turn, can affect borrowing costs for individuals and businesses. Higher interest rates can make loans more expensive, discouraging borrowing and spending.
4. Investment Decisions: Inflation can influence investment decisions. Investors seek returns that outpace inflation to preserve and grow their wealth. High inflation rates may lead investors to favor assets like stocks, real estate, or commodities, which historically have provided better returns than traditional savings accounts during inflationary periods.
5. Income Redistribution: Inflation can have redistributive effects on income. Debtors may benefit from inflation because the real value of their debts decreases over time. However, creditors, such as banks or bondholders, may suffer losses as the real value of their loans or bonds declines.
6. Uncertainty: High or unpredictable inflation can create economic uncertainty. Businesses may hesitate to make long-term investments, and consumers may delay purchases, fearing that prices will rise significantly in the near future. This can slow down economic growth.
7. International Trade: Inflation can affect a country’s international competitiveness. If a country experiences higher inflation than its trading partners, its exports may become more expensive, potentially leading to a trade imbalance.
8. Policy Responses: In response to inflation, governments and central banks may implement policies such as raising interest rates, tightening monetary policy, or adjusting fiscal measures. These policy responses can have wide-ranging effects on the economy.