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Context
- The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to keep the Repo Rate steady at 6.5% for the ninth consecutive meeting.
READ THESE BACKGROUND TOPICS TO UNDERSTAND THIS TOPIC:
INFLATION: https://www.iasgyan.in/daily-current-affairs/inflation-19#:~:text=Inflation%20measures%20the%20average%20price,items%20is%20called%20'deflation'
MONETARY POLICY: https://www.iasgyan.in/daily-current-affairs/monetary-policy
REPO RATE HIKE: https://www.iasgyan.in/daily-current-affairs/repo-rate-hike
REPO RATE: https://www.iasgyan.in/daily-current-affairs/repo-rate#:~:text=The%20increase%20in%20repo%20rate,loans%20are%20likely%20to%20rise.
US FED RATE HIKE: https://www.iasgyan.in/daily-current-affairs/us-fed-rate-hike-46
US FED RATE: https://www.iasgyan.in/rstv/us-fed-rate
CPI: https://www.iasgyan.in/daily-current-affairs/cpi
RBI’s POLICY OF WITHDRAWAL OF ACCOMODATION: https://www.iasgyan.in/daily-current-affairs/rbis-policy-stance-as-withdrawal-of-accommodation
EBLR: EXTERNAL BENCHMARK LENDING RATES (EBLR): https://www.iasgyan.in/daily-current-affairs/rbis-repo-rate-pause
MARGINAL COST OF FUND-BASED LENDING RATE: https://www.iasgyan.in/daily-current-affairs/marginal-cost-of-lending-rate#:~:text=What%20is%20MCLR%3F,home%20loan%20rate%20of%20interest.
Details of recent RBI MPC Meet
- Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to keep the Repo rate steady at 6.5% for the ninth consecutive meeting.
- This decision comes in the wake of persistent food inflation, which continues to pose a threat to overall retail inflation.
- The monetary policy stance remains unchanged at "withdrawal of accommodation," indicating the central bank's cautious approach to balancing inflation control with economic growth.
Impact on Borrowers
- One of the immediate consequences of the MPC’s decision is that banks are likely to keep their interest rates unchanged.
- For borrowers, this is good news as it means that the Equated Monthly Instalments (EMIs) on home and personal loans are expected to remain at their current levels.
- This stability provides some financial predictability for those with existing loans, as the cost of borrowing will not increase for now.
RBI’s Growth and Inflation Outlook
- Despite the challenges posed by high food prices, the RBI has kept its GDP growth projection for the financial year 2025 unchanged at 7.2%. This indicates confidence in the economy’s ability to grow despite inflationary pressures.
- Similarly, the RBI has maintained its retail inflation forecast at 4.5%, even as food inflation remains stubbornly high.
- This reflects the central bank’s belief that it can manage inflation within the target range of 2-6%, as mandated under its flexible inflation targeting regime.
Why the MPC Kept the Repo Rate Unchanged
- The decision to keep the Repo Rate unchanged.
- The primary reason behind this decision is the continued concern over high food inflation. In June, the overall inflation rate, as measured by the Consumer Price Index (CPI), rose to 5.1%, up from 4.8% in May.
- This increase was largely driven by food inflation, which surged to 8.4% in June from 7.9% in May.
- The RBI is particularly worried that if food prices continue to rise, it could derail the path towards lower inflation.
- RBI emphasized the need for vigilance, stating that achieving high economic growth is not possible without ensuring price stability.
- The RBI aims to bring inflation down to 4% on a sustainable basis, and this goal requires careful management of inflationary pressures, especially those stemming from volatile food prices.
Impact on Lending Rates
- For borrowers, the RBI’s decision means that external benchmark lending rates (EBLR), which are directly linked to the Repo rate, will remain unchanged.
- This provides relief to those with home and personal loans, as their EMIs will not increase. However, for loans linked to the Marginal Cost Of Fund-Based Lending Rate (MCLR), there is a possibility that interest rates could rise. This is because banks are still in the process of fully transmitting the 250-basis-point increase in the Repo rate that occurred between May 2022 and February 2023.
- During this period, banks have raised their EBLRs, but the full effect has not yet been seen in MCLR-linked loans.
- As a result, some borrowers might experience a slight increase in their interest rates, especially if banks decide to adjust their lending rates in response to ongoing economic conditions.
How International Events Could Influence India’s Policy
- Global economic conditions are also playing a significant role in shaping expectations around India’s monetary policy.
- For instance, the possibility of rate cuts by the US Federal Reserve could have a direct impact on the RBI’s future decisions. If the Fed starts cutting rates, the RBI might align its policy to avoid significant deviations from global trends. This could lead to a more accommodative stance by the RBI later this year, potentially setting the stage for rate cuts.
- Moreover, global economic fluctuations, such as tensions in the Middle East, movements in the Japanese yen, and concerns about a possible US recession, could influence the RBI’s approach. These factors could affect the rupee’s value and India’s overall economic stability, prompting the RBI to adjust its policy in response to global developments.
Conclusion
- The RBI’s decision to keep the Repo rate steady reflects a cautious approach to managing inflation while supporting economic growth.
- For borrowers, this means continued stability in loan EMIs, but with the possibility of future rate cuts depending on how inflation trends and global conditions
- The RBI’s focus remains on maintaining price stability as a foundation for sustainable growth, and it will continue to navigate the complex economic landscape with vigilance and caution.
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PRACTICE QUESTION
Q. Discuss the impact of the Reserve Bank of India's accommodative stance on the Indian economy. Analyze how this policy affects inflation, growth, and financial stability.
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SOURCE: INDIAN EXPRESS
