RBI Maintains Repo Rate at 6.5% for the 10th Time: Key Takeaways from the Latest Monetary Policy

The Reserve Bank of India (RBI) announced its decision to keep the policy repo rate steady at 6.5% for the tenth consecutive time, marking a continuation of its cautious approach in managing inflation while supporting economic growth. The decision was made during the RBI’s Monetary Policy Committee (MPC) meeting on October 9, 2024, with five out of six MPC members voting in favor of maintaining the current rate. This policy move, led by RBI Governor Shaktikanta Das, reflects the central bank’s efforts to balance inflationary pressures and ensure sustainable economic development.

Key Decisions and Projections from the MPC

Repo Rate Unchanged: The MPC decided to keep the repo rate at 6.5%, continuing the trend set since February 2023. This marks the tenth consecutive time the RBI has maintained this rate, highlighting its commitment to managing inflation within targeted levels.

Economic Growth Forecast: The RBI has maintained its real GDP growth projection for the financial year 2024-25 at 7.2%, signaling confidence in India’s economic resilience amid global uncertainties. This projection aligns with previous estimates and reflects the central bank’s outlook for stable growth in the near future.

Inflation Outlook: The RBI has kept its Consumer Price Index (CPI) inflation forecast for 2024-25 at 4.5%, the same as in its previous policy. Governor Shaktikanta Das noted that food inflation pressures may ease, aided by a favorable agricultural outlook, although weather risks remain a concern.

Monetary Policy Stance Shift: One of the significant outcomes of the meeting was the shift in the RBI’s monetary policy stance from “withdrawal of accommodation” to “neutral.” This change in stance indicates that the central bank is taking a balanced approach, neither actively tightening nor loosening monetary policy, which could pave the way for potential interest rate cuts if inflation remains under control.

Insights from Governor Shaktikanta Das

During the policy announcement, Governor Das emphasized the importance of controlling inflation, which remains the central bank’s primary mandate. He acknowledged that significant efforts have been made to bring inflation under control, using the metaphor of taming a horse to describe inflation management: “It is with a lot of effort that the inflation horse has been brought to the stable. We must be careful about opening the gate lest the horse bolts.”

Das also discussed the improvement in government bond yields, attributing the recent softening of the 10-year bond yields to domestic fiscal consolidation and a shift in policy by the U.S. Federal Reserve. This has contributed to stabilizing India’s external finances and maintaining the rupee’s position as one of the least volatile currencies in the global market.

NBFCs and Banking Sector Health

The Governor also highlighted the strength of India’s banking and Non-Banking Financial Companies (NBFCs) sectors, noting that both sectors have shown impressive growth. However, he issued a word of caution to certain NBFCs that have been aggressively chasing growth without adequately managing risks. Governor Das warned that a “growth at any cost” approach, coupled with high interest rates and processing fees, could pose financial stability risks.

He stressed that while the RBI would not hesitate to intervene if needed, he encouraged self-correction within the NBFC sector. This proactive approach signals the central bank’s ongoing vigilance in maintaining financial stability while fostering growth.

Safeguarding Consumers

In an effort to protect consumers, the RBI has proposed extending the scope of its curbs on pre-payment penalties. Initially limited to individual borrowers of non-business loans, these curbs will now be extended to loans availed by micro and small enterprises (MSEs), providing broader protection to smaller businesses from unfair loan practices.

Additionally, the RBI plans to introduce measures to prevent fraud and wrongful credit transfers by allowing account holders to verify beneficiary account details before transferring funds. This feature, already available for UPI and IMPS transactions, will soon be extended to NEFT and RTGS systems, enhancing the safety of electronic transactions.

External Finances and FPI Flows

Governor Das expressed confidence in India’s ability to comfortably meet its external financing requirements, citing a rebound in Foreign Portfolio Investment (FPI) flows following significant outflows earlier in the year. FDI flows also remain strong, further bolstering the country’s external financial position.

Industry Reactions and Economic Implications

The RBI’s decision to keep the repo rate unchanged was widely expected by market analysts. YES Securities, in its reaction to the policy, noted that the shift to a neutral stance suggests that the central bank is preparing for future flexibility, potentially leading to interest rate cuts in December or February, provided there are no unexpected inflationary shocks, such as rising oil prices.

Amar Ambani, Executive Director of YES Securities, remarked that the RBI’s confidence in the easing of food inflation is reassuring, especially as core inflation appears to be under control. The policy alignment with global central banks, while maintaining focus on India’s domestic inflation dynamics, reflects the RBI’s cautious yet forward-looking approach.

Looking Ahead: Challenges and Opportunities

As the RBI maintains its repo rate at 6.5%, the central bank’s future actions will likely depend on a range of factors, including inflation trends, global economic conditions, and domestic fiscal policies. The agricultural sector’s performance, particularly concerning food prices, will play a critical role in shaping inflation dynamics over the coming months.

While the central bank’s neutral stance leaves room for adjustments, it also indicates a period of wait-and-watch, with potential rate cuts on the horizon if inflation remains within manageable limits. For businesses and consumers, this policy direction provides a stable environment, though risks from external factors such as rising global oil prices and geopolitical tensions remain.

In conclusion, The RBI’s decision to maintain the policy rate at 6.5% for the tenth time in a row reflects a careful balancing act between controlling inflation and fostering economic growth. The shift to a neutral stance signals that the central bank is keeping its options open, potentially leading to rate cuts in the near future if inflationary pressures subside.

Governor Shaktikanta Das’s cautious optimism, reinforced by confidence in India’s financial system and external financing position, underscores the central bank’s commitment to maintaining stability while fostering sustainable growth. As the global economic landscape continues to evolve, the RBI’s approach will remain crucial in shaping India’s monetary policy and economic trajectory.