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Why RBI May Not Change Interest Rate And Maintain Status Quo

The RBI's third monetary policy committee meeting is currently underway and the outcome of the review - whether the interest rates will remain unchanged - will be announced on Thursday morning.

Updated: August 9, 2023 1:28 PM IST

By Business Desk

reserve bank of india, RBI
The repo rate is the rate of interest at which RBI lends to other banks.

New Delhi: The Reserve Bank of India (RBI) may not change the interest rates and continue to pause the rates amid concerns over inflation. The RBI’s third monetary policy committee meeting is currently underway and the outcome of the review will be announced on Thursday morning. RBI typically conducts six bi-monthly meetings in a financial year, where it decides interest rates, money supply, inflation outlook, and various macroeconomic indicators. The ongoing three-day meeting started on Tuesday.

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In its previous meeting in early June, the central bank’s monetary policy committee unanimously decided to keep the repo rate unchanged at 6.5 per cent, something most analysts had expected. The RBI in its April meeting too had paused the repo rate.

Why RBI Is Likely To Hit Pause On Interest Rates

The repo rate is the rate of interest at which RBI lends to other banks. A consistent decline in inflation (currently at an 18-month low) and its potential for further decline may have prompted the central bank to put the brake on the key interest rate again. Inflation has been a concern for many countries, including advanced economies, but India has managed to steer its inflation trajectory quite well.

Barring the April pause, the RBI raised the repo rate by 250 basis points cumulatively to 6.5 per cent since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

India’s retail inflation was above RBI’s 6 per cent target for three consecutive quarters and had managed to fall back to the RBI’s comfort zone only in November 2022. Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.

Now what remains to be seen is whether it will for the third straight time keep the repo rate unchanged or otherwise, given there was an uptick in inflation in June. “While the market is expecting a status quo in the repo rate, it will be keen to hear the RBI’s assessment of the inflation trajectory and the outlook for growth,” Santosh Meena, Head of Research, Swastika Investmart Ltd said.

Shishir Baijal, Chairman and Managing Director, Knight Frank India,”We expect the Reserve Bank of India’s Monetary Policy Committee (RBI MPC) to keep the Repo rate unchanged as inflation rate in India remains within the upper threshold of tolerance. This will help the real estate sector maintain its current momentum. With the last few revisions, the repo rate has gone up by 250 basis points, and as a result of this, the base lending rate for home loans have increased by 160 bps with the last three revisions being completely passed on to the home buyers. This has started to impact housing demand, especially in the affordable segment.”

The borrowing cost, which started rising in May last year, has stabilised with the RBI keeping the repo rate unchanged at 6.5 per cent since February when it was raised from 6.25 per cent. Later, in the two bi-monthly policy reviews in April and June, the benchmark rate was retained.

Punjab and Sind Bank Managing Director Swarup Kumar Saha said the RBI factors in many things, including global development in many things, including global developments. So, it will also take into account interest rate hikes effected by many central banks like the US Fed recently. Due to interest rate increases, yields in the domestic markets have gone.

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