RBI Maintains Repo Rate at 6.5%: A Strategic Decision Amid Global Economic Shifts
In a significant move that reflects the Reserve Bank of India’s (RBI) cautious approach to monetary policy, the Monetary Policy Committee (MPC) announced on Wednesday that it would maintain the repo rate at the current level of 6.5%. This decision comes as the central bank retains its real GDP growth forecast for the fiscal year 2025 at a robust 7.2%. The MPC’s stance signals a careful balancing act between fostering economic growth and managing inflationary pressures.
Inflation Outlook: A Cautious Perspective
During the MPC briefing, RBI Governor Shaktikanta Das provided insights into the inflation trajectory, projecting a moderate increase to 4.8% in the third quarter of the fiscal year. He emphasized that while inflation has been brought within the tolerance band, the path to sustained moderation is likely to be slow and uneven. "The inflation horse has been brought to the stable within the tolerance band. We have to be careful about opening the gate," Das remarked, highlighting the need for vigilance in monetary policy.
This cautious outlook on inflation is particularly relevant given the recent global economic developments that have led to fluctuations in commodity prices, including oil. The potential for rising oil prices to exert upward pressure on inflation is a key concern for the MPC, influencing its decision to maintain the current rate.
Navigating Global Economic Influences
The RBI’s decision to hold the repo rate steady comes in the context of the US Federal Reserve’s recent rate cut of 50 basis points. While there were expectations that the RBI might follow suit, the central bank opted for a more prudent approach, shifting its stance from "withdrawal of accommodation" to "neutral." This change reflects a commitment to prioritizing domestic economic indicators over external pressures.
Governor Das noted that the Indian rupee remains one of the least volatile currencies in the global market, a testament to the resilience of the Indian economy amidst external shocks. This stability is crucial as it provides a buffer against the uncertainties posed by global geopolitical developments.
Financial Stability and the Role of Banks
In his address, Das underscored the importance of financial stability, urging banks and non-banking financial companies (NBFCs) to focus on inoperative accounts, mule accounts, and the evolving cybersecurity landscape. The RBI’s emphasis on these factors highlights the need for a robust financial system that can withstand potential shocks, particularly in light of declining individual savings as a percentage of GDP, which poses a risk to overall financial stability.
Experts have welcomed the RBI’s decision to maintain the repo rate, acknowledging the central bank’s focus on key indicators such as domestic inflation and financial stability. Suresh Darak, Founder of Bondbazaar, pointed out that recent global geopolitical developments have contributed to a surge in oil prices, which could further drive inflation. This context likely influenced the MPC’s decision to hold rates steady, as the central bank navigates a complex economic landscape.
Looking Ahead: Potential for Future Rate Cuts
While the current decision reflects a cautious approach, experts suggest that if the global challenges prove to be temporary, there may be room for a rate cut in the next policy cycle. The recent rise in 10-year benchmark G-sec yields, which have increased by around 10 basis points, underscores the need for ongoing monitoring of economic indicators.
In conclusion, the RBI’s decision to maintain the repo rate at 6.5% is a strategic move aimed at balancing growth and inflation in a volatile global environment. As the central bank continues to assess the evolving economic landscape, stakeholders will be closely watching for signs of future monetary policy adjustments. The RBI’s commitment to financial stability and prudent management of inflation will be crucial in steering the Indian economy through these challenging times.