No change in EMIs: Why has RBI kept the repo rate unchanged again?

The central bank also retained the stance of the monetary policy as “withdrawal of accommodation”. While stating that domestic economic activity is strengthening, the policy panel has projected a lower GDP growth of 7% for FY 2025, down from the 7.3% projected by the National Statistical Office for the current year FY24.

Significantly, the government has projected a higher nominal GDP growth (which includes the pace of inflation) of 10.5% in the Interim Budget presented on February 1, as against 8.9% in 2023-24.

The central bank has retained the headline inflation forecast at 5.4% for the current fiscal as uncertainty persists on the food prices front.

MPC member Jayanth Varma differed with the other members and voted for a 25-basis point reduction in the repo rate, and for changing the policy stance to ‘neutral’ from ‘withdrawal of accommodation’.

Repo rate is the rate at which RBI lends money to banks to meet their short-term funding needs. The MPC, the RBI’s rate-setting panel, is headed by Governor Shaktikanta Das. Here are more details, context, and explanation for the MPC’s decisions.

First, to recall, what will happen to lending and deposit rates?

Interest rates on loans and deposits are largely likely to stay the same. Certain segments of the retail loans are expected to cost more, as the RBI recently hiked the risk weights on retail loans, and many banks raised the Marginal Cost of the Fund-based Lending Rate (MCLR).

External benchmark lending rates that are linked to the repo rate will not rise. This will provide some relief to borrowers as their equated monthly instalments (EMIs) will not increase.

However, since banks are under pressure on the deposit growth front due to the competition from mutual funds (MFs) for funds, deposit rates are likely to rise in certain buckets.

But why has the RBI kept the repo rate unchanged?

A major reason for the continued pause in the repo rate is that retail inflation continues to remain above the 4% target of the RBI.

Retail inflation (CPI) rose to 5.55% in November from 4.87% in October and 5.02% in September but increased to 5.69% in December. Even in FY25, the RBI has forecast a 4.5% retail inflation.

“Going forward, the inflation trajectory would be shaped by the evolving food inflation outlook. Rabi sowing has surpassed last year’s level. The usual seasonal correction in vegetable prices is continuing, though unevenly. Yet considerable uncertainty prevails on the food price outlook from the possibility of adverse weather events,” Governor Das said.

This is the sixth monetary policy on the trot when the MPC has kept the repo rate unchanged at 6.5%. The last time the repo rate was raised (from 6.25% to 6.5%) was in February 2023. Between May 2022 and February 2023, the policy rate was raised by 250 bps. One basis point is one-hundredth of a percentage point.

And why has there been no change in the policy stance?

The RBI has retained the policy stance as ‘withdrawal of accommodation’ despite the deficit in the liquidity in recent weeks. “Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis,” Das said.

However, analysts said there is a strong case for the RBI to change its stance from ‘withdrawal of accommodation’ to ‘neutral’. The financial condition has tightened over the last few quarters, and real rates are reasonably high and likely to increase further as inflation is trending down. The liquidity condition has also tightened, they argue.