RBI Keeps Repo Rate Unchanged at 6.5% for Eighth Consecutive Time: No Increase in Loan Costs or EMI

The Reserve Bank of India (RBI) has once again decided to keep the interest rates unchanged, marking the eighth consecutive instance of this decision. The current interest rate remains steady at 6.5%, meaning there will be no increase in loan costs, and consequently, your EMI payments will not rise either. The last adjustment by the RBI was in February 2023, when the rate was increased by 0.25% to reach 6.5%.

RBI Governor Shaktikanta Das announced these decisions today, Friday, June 5th, following the Monetary Policy Committee (MPC) meeting that began earlier this week. The MPC meetings, which occur bi-monthly, are crucial for setting the country’s monetary policy. In its previous meeting held in April, the RBI also opted not to raise interest rates.

The MPC consists of six members, including both external and RBI officials. Alongside Governor Das, the committee includes RBI Executive Director Rajiv Ranjan and Deputy Governor Michael Debabrata Patra. The external members are Shashanka Bhide, Ashima Goyal, and Jayanth R. Varma. These members collectively deliberate on and decide the country’s monetary policy direction.

Significant Increases in Repo Rate During FY 2022-23

In the financial year 2022-23, the Reserve Bank of India (RBI) implemented a total of six increases in the repo rate, amounting to a cumulative rise of 2.50%. The first meeting of the fiscal year took place in April 2022, during which the RBI maintained the repo rate at 4%. However, in an emergency meeting held on May 2nd and 3rd, the RBI raised the repo rate by 0.40%, bringing it to 4.40%.

This marked the first adjustment in the repo rate since May 22, 2020. Subsequently, in the meeting held from June 6th to 8th, the repo rate was further increased by 0.50%, raising it from 4.40% to 4.90%. In August, another 0.50% hike brought the rate up to 5.40%.

In September, the interest rate climbed to 5.90%, followed by another increase in December, pushing the rate to 6.25%. The final monetary policy meeting for FY 2022-23 was held in February, where the interest rate was raised from 6.25% to 6.50%. These adjustments reflect the RBI’s efforts to manage inflation and stabilize the economy during a turbulent period.

Inflation Under Control

RBI Governor Shaktikanta Das addressed concerns about inflation, stating that “the elephant (inflation) has now gone out for a walk and is heading to the forest,” implying that inflation is no longer rising. This statement signifies that the measures taken by the RBI have successfully curbed the inflationary trend.

Additionally, Governor Das provided projections for the upcoming financial year 2024-25. He forecasted that inflation would stabilize at around 4.5%, while the real GDP growth is expected to reach 7%. These estimates indicate a positive economic outlook, suggesting that the Indian economy is on a path to stability and growth following the period of high inflation.

Repo Rate: A Powerful Tool Against Inflation

The Reserve Bank of India (RBI) wields the repo rate as a potent weapon in the fight against inflation. When inflation rises significantly, the RBI increases the repo rate to reduce the flow of money within the economy. A higher repo rate makes loans from the RBI more expensive for banks.

Consequently, banks raise the cost of loans for their customers. This decrease in money flow within the economy lowers demand and, in turn, reduces inflation.

Conversely, when the economy faces a downturn, there is a need to boost the flow of money to aid recovery. In such situations, the RBI reduces the repo rate. This makes loans from the RBI cheaper for banks, and they, in turn, offer loans to customers at lower rates.

For instance, during the COVID-19 pandemic, economic activities came to a halt, leading to reduced demand. The RBI responded by cutting interest rates to increase the flow of money within the economy. This move aimed to stimulate demand and support economic recovery.

Impact of Changes in the Reverse Repo Rate

The reverse repo rate is the interest rate at which the RBI pays banks to park their funds with the central bank. When the RBI needs to reduce liquidity in the market, it increases the reverse repo rate.

By raising this rate, the RBI incentivizes banks to deposit their excess funds with it to earn interest. This mechanism is particularly useful during periods of high inflation, as it effectively reduces the amount of money banks have available to lend to their customers, thereby tightening liquidity in the economy.

When the reverse repo rate is increased, banks find it more attractive to hold their funds with the RBI rather than lending them out, leading to a reduction in the money supply. This helps control inflation by decreasing the amount of money circulating in the economy, as banks have less capital to extend as loans to businesses and consumers.

RBI’s Projections for Inflation and GDP Growth

In February, the Reserve Bank of India (RBI) released its estimates for inflation and GDP growth. For the financial year 2024-25, the RBI raised the real GDP growth forecast from 6.70% to 7%. This upward revision reflects the central bank’s optimism about the country’s economic recovery and growth prospects.

Additionally, the RBI projected retail inflation to be at 4.50% for FY25. This estimate suggests that the RBI expects inflation to remain under control, aligning with its broader goal of maintaining economic stability while fostering growth. These projections provide valuable insights into the RBI’s outlook and policy direction for the upcoming fiscal year.

Understanding Inflation Statistics

Retail Inflation in April: 4.83%

In April 2024, retail inflation decreased to 4.83%, marking the lowest level in 11 months. The previous low was in June 2023, at 4.81%. Just a month prior, in March 2024, the inflation rate was 4.85%. The RBI aims to keep retail inflation within a target range of 2% to 6%, ideally around 4%. This recent decrease indicates a positive trend towards the RBI’s desired inflation rate.

Wholesale Inflation in April: 1.26%

Wholesale inflation increased to 1.26% in April, reaching the highest level in 13 months. The previous month, March 2023, saw a wholesale inflation rate of 1.34%. This rise is attributed to the increased prices of food items. In March 2024, wholesale inflation was 0.53%, and it was 0.20% in February and 0.27% in January. The consistent rise in wholesale inflation highlights the ongoing pressures in the supply chain, particularly in the food sector.

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 rupees earned will effectively be only 93 rupees. This decrease in value means that your money buys less over time. 

Therefore, it is essential to consider inflation when making investments; otherwise, the real value of your money will diminish. Investments that outpace inflation can help preserve and grow your purchasing power, ensuring that your savings maintain their value over the long term.