RBI surprises with a pause, keeps repo rate unchanged at 6.5%

The RBI’s move will give a breather to borrowers as their lending rates, which are linked to repo rate, will not increase.

“The MPC decided to keep the policy repo rate unchanged at 6.5 per cent in this meeting, with readiness to act, should the situation so warrant. The MPC will continue to keep a strong vigil on the evolving inflation and growth outlook and will not hesitate to take further action as may be required in its future meetings,” RBI Governor Shaktikanta Das said.

He, however, emphasised that the decision to hit pause on the repo rate was only for the current meeting. “If I have to characterise today’s monetary policy in just one line, I would say it’s a pause, not a pivot,” Das told reporters at the post-policy press conference.

Explaining the rationale, he said while the recent high frequency indicators suggest some improvement in global economic activity, the outlook is now tempered by additional downside risks from financial stability concerns. Headline inflation is moderating but remains well above the targets of central banks.

“These developments have led to heightened volatility in global financial markets as reflected in sizeable two-way movements in bond yields, fall in equity markets and the US dollar shedding its gains from its peak of September 2022,” Das said.

He said, going ahead, headline inflation is projected to moderate in 2023-24.

“The monetary policy actions taken since May 2022 are still working through the system. Accordingly, the MPC decided to keep the policy rate unchanged to assess the progress made so far, while closely monitoring the evolving inflation outlook,” Das said.

Commenting on the development, State Bank of India Chairman Dinesh Khara said the RBI’s decision to pause rate hike for now was a pleasant surprise given the market talk of one more rate hike. “With uncertainty looming large, this decision was perfectly timed,” he said.

The RBI’s status quo comes at a time when other major central banks have raised interest rates, as they remain cautious over the global banking crisis. Last month, the European Central Bank and US Federal Reserve raised their interest rates by 50 bps and 25 bps respectively.

Since May 2022, the monetary policy committee has met six times. At three of these meetings, the members voted unanimously for a rate action. In the May 2022 meeting, the six-member committee voted unanimously for a 40 bps hike in repo rate. In June 2022, all the members voted for a 50 bps increase in the repo rate. And today, the six MPC members voted for a pause.

In the September 2022, December 2022 and February 2023 meetings, the members had differences of opinion.

In its latest review, the RBI raised the real GDP growth forecast to 6.5 per cent for fiscal 2023-24 from a forecast of 6.4 per cent announced during February 2023 policy. The country’s real gross domestic product (GDP) is expected to have recorded a growth of 7 per cent in 2022-23. The central bank sees CPI inflation easing to 5.2 per cent in 2023-24. In February, the retail inflation for FY2024 was projected at 5.3 per cent.

“With CPI headline inflation ruling persistently above the tolerance band, the MPC decided to remain resolutely focused on aligning inflation with the target. It is essential to rein in the generalisation of price pressures and anchor inflation expectations. An environment of low and stable prices is necessary for the resilience in domestic economic activity to be sustained,” Das said.

He reiterated that the target for retail inflation is 4 per cent and the RBI will work towards achieving it.

The MPC’s decision to pause will give relief to borrowers as the external benchmark based lending rate (EBLR), which is linked to repo rate, will not increase. The RBI has raised the repo rate by 250 basis points (bps) since May 2022, thereby increasing the EBLR by 250 bps. Banks have also raised the lending rate linked to marginal cost of funds based lending rate (MCLR) in the past 11 months, resulting in higher lending rates.