Monetary policy committee continues status quo on repo rate at 6.5%

Monetary policy committee continues status quo on repo rate at 6.5%

Subject : Economy

Section: Monetary Policy

In News: Reserve Bank of India (RBI) Thursday left the main policy instrument, repo rate, unchanged at 6.50 per cent for the second consecutive monetary policy

Key points:

• Has kept rate unchanged after hiking it consecutively for 6 times from May 2022 – April 2023
• RBI has retained the real GDP growth projection at 6.5 % for FY2024 but cut the inflation (CPI) projection marginally from 5.2 per cent to 1 % for the current fiscal.
• Inflation at 6.7 % in 2022-23 was above the tolerance limit of 6%.
• Headline inflation (Consumer CPI) is still above the target of 4%
• rate action in the policy is “a pause and not a pivot” meaning RBI still focused on “withdrawal of accommodation” (reducing liquidity) and not entering a cycle of reducing interest rates.
• Growth supported by:
  • Higher rabi crop production, expected normal monsoon, continued buoyancy in services and softening inflation should support household consumption.
  • Healthy twin balance sheets of banks and corporates, supply chain normalisation and declining uncertainty, conditions are favourable for the capex cycle to gain momentum
• Risks to growth:
  • weak external demand, volatility in global financial markets, protracted geopolitical tensions and intensity of El Nino impact

Impact on home loan

• When the RBI lowers the repo rate, the cost of borrowing for banks goes down. Banks are expected to pass on this benefit to the consumers eventually. Conversely, home loan interest rates go up with the RBI making an upwards tweak in its lending rate.
• Incidentally, banks are quicker in passing on the increase in rates to the customers, while they are generally quite slow in reducing their lending rates. So, even though changes in the repo rate should reflect in financial institutions’ interest rates immediately, only increases see fast transmission and often the RBI has to nudge banks, to pass on the benefits of reduced rates to borrowers.

Impact on Fixed Deposits

• Many financial institutes often increase the interest rates on FDs when they increase the repo rates, making FDs more attractive to investors. It means that investors who are looking for stable returns can now invest their money in FDs and get higher returns.