5 min readMumbai, New DelhiApr 8, 2023 11:55 AM IST
First published on: Apr 6, 2023 at 01:39 PM IST
In a surprise move that went against the street expectations of a 25 basis points rate hike, the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 6.5 per cent amid concerns over the global banking crisis.
Even as the central bank expects retail inflation to moderate to 5.2 percent in FY 2023-24, it pointed out that core inflation — non-food, non-fuel component — could stay elevated due to lagged pass-through of input costs.
The decision to hold
The decision to keep the repo rate unchanged was taken unanimously by the six-member Monetary Policy Committee (MPC). In the past few policies, the MPC members had differences of opinion on the rate action.
In the February 2023 monetary policy, while Ashima Goyal and Jayanth R Varma voted against the repo rate hike, Shashanka Bhide, Rajiv Ranjan, RBI Governor Shaktikanta Das and Deputy Governor Michael Debabrata Patra voted for a hike in the repo rate by 25 bps. In December 2022 policy, except for Varma, all other members voted to increase the repo rate by 35 bps.
The stance and the impact
The MPC decided by a majority of five out of six members, to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.
The MPC’s decision to pause in its first meeting of the current financial year will give relief to borrowers as the external benchmark based lending rate (EBLR), which are 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.
Reasons for the pause
The RBI underlined risks from protracted geopolitical tensions, tight global financial conditions and global financial market volatility to its monetary policy outlook. “Global financial market volatility has surged, with potential upsides for imported inflation risks,” it said.
Concerns over slowing consumption and tepid private investment have been emerging in policy quarters, with many seeing high interest rates as a crucial factor in dampening demand. The pause by the RBI will help favour the growth-inflation tradeoff towards the former. This comes in the backdrop of many global agencies lowering India’s growth forecasts for this financial year amid expectations of global economic slowdown and monetary tightening by other countries.
However, in February, after the RBI’s central board meeting, RBI Governor Shaktikanta Das had justified the rate hikes saying that the real interest rates had just turned positive after being in the negative territory for the last three years and that the RBI’s rate actions have been in line with its objective of maintaining price stability, as has been “mandated under the law”. Das had also said that negative real interest rates — a situation where the inflation rate is higher than the nominal interest rate — for a prolonged period of time “can create instability in the financial system”.
The government has been leaning in favour of a benign pace of rate hikes by the RBI, citing the need for a de-linking of monetary policy stance from that of central banks of developed economies. In September last year, Finance Minister Nirmala Sitharaman had said policy actions of the RBI may not be synchronised as much as developed central banks
The hikes so far
The RBI has increased the repo rate by a cumulative 250 basis points to 6.50 per cent in the last 11 months, starting May 2022, to rein in inflation. In February, the RBI raised the repo rate by 25 basis points to 6.5 per cent.
The MPC hiked the repo rate by 35 bps in December 2022. The RBI hiked the repo rate by 40 bps in May and then by 50 bps in each of the three successive meetings. A basis point is one hundredth of one percentage point.
Growth projection
The RBI has projected real GDP growth for 2023-24 at 6.5 per cent. This is higher than the forecast of 6.4 per cent made in the February 2023 policy. The RBI Governor said the country’s real gross domestic product (GDP) is expected to have recorded a growth of 7 per cent in 2022-23.
Inflation forecast
Assuming an annual average crude oil price (Indian basket) of $ 85 per barrel and a normal monsoon, the RBI has projected CPI inflation to be at 5.2 per cent for 2023-24, lower than the expectation of 5.3 per cent announced in the February 2023 policy.
RBI Governor Shaktikanta Das on Thursday announced the monetary policy statement of the central bank. The Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) kept the repo rate, its key lending rate, unchanged at 6.50 per cent, and maintained its stance on “withdrawal of accommodation.” (File) 
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