RBI Keeps Lending Rate Unchanged for the Third Time: Implications Explained

RBI Governor Reveals Outcomes of MPC Meeting: Key Announcements Unveiled

Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), disclosed the outcomes of the bi-monthly monetary policy for the fiscal year 2023-24 on Thursday. The central bank, after a meeting held by the six-member Monetary Policy Committee (MPC) from August 8 to 10, decided to maintain status quo by keeping the repo rate steady at 6.5%. This marks the third consecutive policy meeting where the central bank chose not to alter the lending rate.

Despite improving macroeconomic conditions, RBI has refrained from making adjustments to the interest rates. Since May 2022, the central bank has raised the repo rate by 250 basis points.

The RBI's monetary policy has significant implications against the backdrop of evolving domestic and global economic scenarios. Its decisions have a vital impact on India's economic recovery, inflation trends, and overall financial stability.

In its latest decision, the MPC unanimously chose to keep the policy repo rate unchanged at 6.5%. This consequently maintains the spending deposit facility (SDF) at 6.25%, while the marginal standing facility (MSF) and the bank rate remain at 6.75%.

Effective from August 12, scheduled banks are required to maintain an incremental cash reserve ratio (I-CRR) of 10% on the increase in their net demand and time liabilities between May 19 and July 28. This temporary measure aims to manage current liquidity and will be reevaluated on September 8 or earlier.

The existing cash reserve ratio (CRR) remains unaltered at 4.5%. The current account deficit is expected to remain manageable in the current fiscal year due to strong services exports and significant remittance inflows.

The MPC, with a majority of five out of six members, aims to focus on withdrawing accommodation to align inflation with the target while supporting growth. The retail inflation forecast for Q2 is 6.2%, Q3 at 5.7%, and Q4 at 5.2%. The first quarter of the year witnessed robust construction activities.

Although headline inflation is anticipated to rise due to factors such as vegetable prices, a potential reversal is expected in the coming months. The MPC is watchful of possible El Nino weather conditions and global food prices, particularly given the skewed southwest monsoon so far.

The MPC remains dedicated to aligning inflation with the 4% target and maintaining stable inflation expectations. The cumulative rate hike of 250 basis points from FY23 is gradually influencing the economy.

Despite the cumulative rate hike, India's robust macroeconomic fundamentals have driven strong growth, contributing around 15% to global growth. Continued supply-side interventions are deemed necessary in light of emerging trends and risks to price stability.

With recent fluctuations in crude oil prices and uncertainties in demand and supply, the outlook for oil remains clouded. The surplus liquidity level has risen due to the withdrawal of ₹2000 banknotes and dividends to the government.

In terms of foreign direct investment (FDI), net FDI fell to USD 5.5 billion during April-May, compared to USD 10.6 billion in the corresponding period last year.

RBI has proposed a framework for allowing borrowers to switch to a fixed interest rate regime. Additionally, a transparent system is being proposed for resetting interest rates on floating interest rate loans.