MPC votes for pause, keeps repo rate unchanged at 6.5%

The Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 6.5 per cent. While announcing the decision, RBI governor Shaktikanta Das said that the monetary policy committee (MPC) voted unanimously to keep the rate unchanged. Das said that the decision is for “this meeting only”.

Das said that the MPC voted 5-1 to remain focussed on “withdrawal of accommodation” 

He added that the path to bring and keep inflation within the target limit is proving to be “long and ardous”. 

Das said that the real GDP growth in 2022-23 was 7 per cent. The economic activity remains “resilient”.  

In the current financial year, FY24, the GDP is expected to jump 6.5 per cent.

Das said that GDP growth forecast for April-June (Q1FY24) has been retained at 7.8 per cent. For the second quarter, it has been retained at 6.2 per cent. In Q3, the GDP is expected to rise 6.1 per cent. 

In the last quarter, the Indian GDP is expected to grow 5.9 per cent. 

RBI MPC: Inflation projection lowered

The retail inflation forecast for FY24 has been lowered to 5.2 per cent from 5.3 per cent previously. 

In Q1FY24, consumer price index (CPI)-based inflation is expected to be 5.1 per cent. Earlier, it was 5 per cent. 

For Q2FY24, the inflation forecast has been retained at 5.4 per cent. In Q3 and Q4, the retail inflation forecast has been kept at 5.4 and 5.2 per cent respectively.

This rate is used by the RBI to control the liquidity in the economy. 

What is the MPC?

The monetary policy committee (MPC) is a six-member committee set up to determine the set of actions to control the money supply, inflation and economic growth in the country. 

Its current members are RBI governor Shaktikanta Das, Michael Debabrata Patra, Mridul Saggar, Jayanth R Varma, Ashima Goyal, and Shashanka Bhide.

The committee meets at least four times a year to come up with the monetary policy. However, it may also meet out of the cycle if it feels the need to do so. 

In May 2022, the MPC had made an out-of-cycle announcement to hike the repo rate by 40 basis points. This was done in the wake of rising inflation due to the war in Ukraine.

What is the main aim of MPC?

The MPC is mandated to keep the retail inflation at 4 per cent — within a band of 2 per cent on either side. If the average inflation stays beyond this band for three consecutive quarters, it is considered a failure.

In 2022, the average inflation was above 6 per cent in January-March, April-June, and July-September quarters.

How have repo rates changed in India?

The current cycle of repo rate hikes started in May 2022. Since May 2020, the repo rate was kept at 4 per cent. However, in May 2022, it was hiked to 4.4 per cent. On June 8, 2022, it was further raised by 50 bps to 4.9 per cent. 

In the next MPC announcement on August 5, 2022, the repo rate was again raised by 50 bps to 5.4 per cent. On September 30, 2022, the repo rate again hiked to 5.9 per cent. 

Since then till today, the repo rate were raised twice on December 7, 2022, and February 8 by 25 bps each. Before today’s MPC announcement, the repo rate stood at 6.5 per cent.   

How does the repo rate affect you?

The repo rate is the benchmark rate used by the banks to determine the interest rate they want to give on the deposits as well as the interest at which they want to lend loans to the public. 

The interest rates are directly proportional to the repo rate. If the repo rate goes up, the bank deposits start yielding better returns. At the same time, loans become costlier. In other words, it makes money costlier to borrow and spend.

With this, the RBI can reduce the flow of money in the economy and in return, control inflation. 

On the other hand, if the RBI wants to create more liquidity in the economy, they reduce the repo rate, making loans cheaper and deposits unattractive.