RBI’s Monetary Policy Committee Keeps Repo Rate Unchanged at 6.50%: Impact on Borrowing Costs and Economic Growth in India

06-10-2023 : As anticipated by economists and market analysts, the Reserve Bank of India (RBI), through its Monetary Policy Committee (MPC), has opted to maintain the status quo by keeping the policy repo rate unchanged at 6.50%. This decision, announced on Friday, carries significant implications for the Indian economy and financial landscape.

The repo rate is the interest rate at which the RBI lends funds to commercial banks. When the repo rate is high, it translates into higher borrowing costs for banks, subsequently leading to an increase in the Equated Monthly Installments (EMIs) for various loans, such as housing, automobile, and business loans.

With the RBI opting to retain the policy repo rate at its current level, it implies that EMIs for housing, car, business, and other loans will not experience any immediate upward adjustments.

In the announcement of this monetary policy decision for the month of October, RBI Governor Shaktikanta Das highlighted the comprehensive evaluation carried out by the MPC. After assessing the evolving macroeconomic and financial developments, the committee reached a unanimous consensus to maintain the policy repo rate at 6.5%.

Moreover, the MPC, comprising six members, arrived at a majority decision, with five out of six members emphasizing the importance of gradually withdrawing accommodation measures to align inflation with the target while also supporting economic growth.

Governor Das elucidated the rationale behind the MPC’s resolution, citing the surge in headline inflation during July, primarily driven by elevated prices of items like tomatoes and other vegetables. He noted that this inflationary pressure had somewhat alleviated in August and was expected to further ease in September as these prices normalized.

However, Governor Das highlighted a lingering concern: a decline in the cultivation of key crops, such as pulses and oilseeds, due to uncertainties arising from factors like lower reservoir levels and volatile global food and energy prices. These factors, along with the recurring incidence of significant food price fluctuations, could potentially contribute to persistent headline inflation.

Despite these challenges, Governor Das noted the resilience of economic activity in India. Taking into account the evolving dynamics of inflation, growth, and the cumulative policy repo rate hike of 250 basis points, which is still permeating through the economy, the MPC opted to maintain the policy repo rate at 6.5% during this meeting.

Governor Das also emphasized that the transmission of the 250 basis points increase in the policy repo rate to bank lending and deposit rates was not yet complete. Therefore, the MPC has chosen to maintain its focus on gradually withdrawing accommodation measures.