Why Has the RBI Policy Panel Kept Interest Rates Unchanged for the 9th Time?

Why Has the RBI Policy Panel Kept Interest Rates Unchanged for the 9th Time?

Sub: Eco

Sec: Monetary Policy

• Persistent Food Inflation:
  • The RBI’s Monetary Policy Committee (MPC) kept the Repo rate steady at 6.5% for the ninth consecutive time due to persistent food inflation.
  • Food inflation remains a significant concern as it could derail the disinflation path, which is crucial for maintaining price stability.
• Impact on Retail Inflation:
  • The headline inflation, measured by the year-on-year changes in the all-India Consumer Price Index (CPI), rose to 5.1% in June from 4.8% in May.
  • Food inflation contributed around 70% of the overall retail inflation, making it a major factor in the MPC’s decision to keep rates unchanged.
• RBI’s Vigilance on Price Stability:
  • RBI Governor emphasized the need for vigilance to prevent spillovers or second-round effects from persistent food inflation.
  • The MPC aims to preserve the gains made so far in monetary policy credibility by maintaining a cautious stance on interest rates.
• Economic Forecasts and Growth Projections:
  • The RBI has kept the GDP growth projection for FY2025 unchanged at 7.2% and the retail inflation forecast at 4.5%, despite the challenges posed by food inflation.
  • The MPC believes that high growth cannot be achieved without price stability, underscoring the importance of controlling inflation.
• Potential for Future Rate Cuts:
  • Economists suggest that a rate cut may be possible in December 2024, provided that the inflation situation improves due to a good monsoon and the absence of major domestic or global shocks.
  • The RBI is likely to monitor incoming data and exercise caution before deciding on any rate cuts.
• Impact on Lending Rates:
  • With the Repo rate unchanged, external benchmark lending rates (EBLR) linked to the Repo rate will remain steady, providing relief to borrowers as their EMIs on home and personal loans will not increase.
  • However, lenders may raise interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR), where the full transmission of previous rate hikes has not yet occurred.
• Global Economic Considerations:
  • The RBI’s policy decisions are also influenced by global economic events, including potential rate cuts by the US Federal Reserve and geopolitical uncertainties.
  • The RBI may consider aligning its monetary policy with the global rate cycle to reduce any significant future policy deviations.

In summary, the RBI’s decision to keep interest rates unchanged for the ninth consecutive time is driven by the need to manage persistent food inflation and ensure price stability while being cautious about future rate cuts.