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RBI Holds Repo Rate at 6.5%, Signals Potential Rate Cut Amid Global Uncertainties

National Age by National Age
October 9, 2024
in Business
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RBI Holds Repo Rate at 6.5%, Signals Potential Rate Cut Amid Global Uncertainties
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The Reserve Bank of India (RBI) has once again decided to hold its benchmark interest rate, the repo rate, steady at 6.5%, marking the tenth consecutive review without a change. The decision was made during the Monetary Policy Committee (MPC) meeting held from October 7 to 9.

While the six-member MPC changed its policy stance from “withdrawal of accommodation” to a more flexible “neutral” stance, it maintained its inflation and GDP growth projections at 4.5% and 7.2% for FY2025, respectively. The move provides the RBI more room to adjust to evolving economic conditions while continuing to focus on inflation control.

In a significant development, RBI Governor Shaktikanta Das had been cautious about cutting interest rates, pointing to elevated food prices and global geopolitical risks that could keep inflation above the RBI’s 4% target.

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As Sunil Kanoria, founder of Vara Technology, a fintech company, noted, “Governor Shaktikanta Das had been reluctant to cut interest rates, citing concerns that high food prices and geopolitical risks could keep inflation above the Reserve Bank of India’s (RBI) 4 percent target. While inflation appears to be tamed, these global uncertainties have prevented Mr. Das from making immediate rate cuts.”

However, in a positive shift, the MPC adopted a “neutral” stance, indicating potential rate cuts if conditions allow. Kanoria added, “Increased government spending on infrastructure, in line with budgetary expectations, points to further economic progress, which could help moderate headline inflation. Additionally, forecasts of a good crop output are expected to contain food inflation, further easing price pressures.” He suggested that a 0.25% rate cut could happen in December if these trends continue.

This new stance offers some relief to borrowers, as the unchanged repo rate ensures that loans tied to external benchmark lending rates (EBLR) won’t see higher equated monthly installments (EMIs). However, interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR) could still rise, as banks haven’t fully transmitted the 250-basis-point increase in the repo rate since May 2022.

With inflation expected to spike in September due to unfavorable base effects and high food prices, the RBI forecasts a moderation by the fourth quarter of FY2024, driven by a good kharif harvest and solid buffer stocks of cereals. Das remains cautious about external risks, such as volatile oil prices and global food and metal price increases.

“The RBI’s new stance shows readiness to support growth, potentially reducing the repurchase rate to 6 percent by early next year, as long as inflation remains controlled and geopolitical risks do not escalate further,” Kanoria noted.

This signals the central bank’s optimism, and many analysts now predict a gradual rate cut starting in December 2024.

Tags: fintech companyRBISunil KanoriaVara Technology
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