India's central bank keeps the pause on key rates

India's Monetary Policy Committee (MPC) unanimously decided to keep interest rates unchanged for the fifth consecutive time.

The Reserve Bank of India left the repo rate at 6.5 per cent while taking into account easing inflationary pressures and robust economic growth data.

"The rate action so far is still working its way into the economy. Hence, the Monetary Policy Committee decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth," RBI Governor Shaktikanta Das said.

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'Withdrawal of accommodation' is a term used by the central bank to denote a tighter monetary policy which reduces liquidity to control inflation.

The RBI hiked the repo rate from 4 per cent to 6.5 per cent between May 2022 and February 2023 before pausing the hikes.

The central bank retained its projection for retail (CPI) inflation – which includes food & essential commodities – at 5.4 per cent for the current fiscal year, 2023-24.

However, inflation is expected to fall below five per cent by 2024, provided India receives normal rainfall.

"Policymakers have to be mindful of the risk of being carried away by a few months of good data or by the fact that CPI inflation has come within the target range," Das said, indicating that the RBI will continue to maintain a hawkish stance on inflation.

The Ukraine war disrupted the already distorted pandemic-led global supply chain, which led to high consumer inflation in India. However, things have eased out since then.

Retail inflation remained under the RBI's target range of 4-6% in October -- 4.87%. However, the central bank added that India is still far from bringing inflation under four per cent.

India is doing well, but headwinds remain

Das said the Indian economy presents a picture of 'resilience and momentum', pointing to the July-September quarter growth rate of 7.6 per cent that defied expectation.

"The fundamentals of the Indian economy remain strong... Consumer and business optimism create congenial conditions for sustained growth of the Indian economy," Das added.

The central bank also revised the real GDP growth rate for 2023-24 from 6.5 per cent to 7.0 per cent.

Improving rural demand, strengthening manufacturing activity, buoyancy in services, and government infrastructure spending could help India end the current financial year on a high.

Even with the bright economic forecast, challenges will persist in 2024 due to the fragile global economy.

"Elevated debt levels, geopolitical hostilities and extreme weather conditions remain risks to the inflation outlook," RBI Governor Shaktikanta Das said.

Uncertain food prices are likely to impact inflation in the near term, with elevated sugar prices likely to be a cause for concern.

What is the repo rate?

The repo rate or repurchase rate is when the central bank lends money to commercial banks in India. A change in the repo rate affects the money flow in the economy.

A cut in repo rate leads to increased money circulation -- colloquially called easy money policy. On the other hand, if the repo rate rises, money circulation is curtailed, and borrowing costs rise.

In India, the repo rate is a tool the central bank uses to curb economic inflation.

Industryspeaks

Adhil Shetty, CEO of Bankbazaar, welcomed the pause in the repo rate, pointing out that a stable lending rate can encourage investments and foster economic growth.

The policy stability, he argued, may bolster buyer sentiments in the real estate sector.

"Existing borrowers can rest assured that their EMIs won't be immediately affected. Prospective homebuyers may find relief in the stable repo rate, allowing them to plan their moves without the imminent threat of rate hikes," he said.

Terming the rate pause 'hawkish', Bhuvan Rustagi, Co-Founder, Lendbox, added that the announcement is good news for Indian retail investors.

"While interest rates remain unchanged in the short term, a stable economic environment and controlled inflation can provide a positive long-term outlook for investment. Savings and Deposit rates are likely to remain stable which translates into a positive investment option for investors looking for stable returns," he said.

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