Why RBI Keeping Repo Rate Unchanged At 6.5% Is Both Good News And Bad
If the pause in rate hikes continues for some time, then there is better certainty on interest rates and hence borrowing costs.
The Monetary Policy Committee of the Reserve Bank of India (RBI) surprised the market by deciding to keep the Repo rate unchanged at 6.5%. The Repo rate is the rate at which banks can borrow short-term funds from the central bank and sets the informal base for all other interest rates.�
Why is this a surprise?
The RBI has been steadily increasing the Repo rate in order to control liquidity in the system and so fight inflation. The RBI had hiked the Repo rate six times in succession since May 2022, and was widely expected to tack on a further 0.25% to the Repo rate this time around. That's because inflation is by no means under control. Retail inflation as measured by the Consumer Price Index stood at 6.4%, still well above the RBI's target ceiling of 6%. And also because the US Federal Reserve – whose cues the rest of the world's central banks tend to follow – had just hiked rates by 0.25%.
So is this good news or bad?
Bit of both. A pause in lending rate increases is welcome news for all borrowers – from you and me and our housing and car loan EMIs to the Adanis of the world, who borrow in billions. On the other hand, pausing the ra...
The Monetary Policy Committee of the Reserve Bank of India (RBI) surprised the market by deciding to keep the Repo rate unchanged at 6.5%. The Repo rate is the rate at which banks can borrow short-term funds from the central bank and sets the informal base for all other interest rates.
Why is this a surprise?
The RBI has been steadily increasing the Repo rate in order to control liquidity in the system and so fight inflation. The RBI had hiked the Repo rate six times in succession since May 2022, and was widely expected to tack on a further 0.25% to the Repo rate this time around. That's because inflation is by no means under control. Retail inflation as measured by the Consumer Price Index stood at 6.4%, still well above the RBI's target ceiling of 6%. And also because the US Federal Reserve – whose cues the rest of the world's central banks tend to follow – had just hiked rates by 0.25%.
So is this good news or bad?
Bit of both. A pause in lending rate increases is welcome news for all borrowers – from you and me and our housing and car loan EMIs to the Adanis of the world, who borrow in billions. On the other hand, pausing the rate hikes too early might reignite inflation. While RBI expects inflation to ease as the current financial year progresses, this can be upturned by an exceptionally hot summer (already predicted) or a failed monsoon, which can send food prices soaring. RBI Governor Shaktikanta Das has however, kept his powder dry by underlining that the pause was for this review cycle only.
On the other hand…
If the pause in rate hikes continues for some time – as appears likely if inflation does not shoot up – then there is better certainty on interest rates and hence borrowing costs. This in turn can help boost growth, which RBI has projected at 6.5% for the current fiscal. And growth is a rising tide which can lift all boats.
