RBI holds repo rate steady at 6.5% for eighth time
What's the story
The Reserve Bank of India's Monetary Policy Committee (MPC) has maintained the repo rate at 6.5% for the eighth consecutive time. This decision was taken during the MPC's first meeting following the Lok Sabha election results announcement. The unchanged repo rate, linked to all external benchmark lending rates, ensures that borrowers' equated monthly instalments (EMIs) will not increase.
Loan impact
Lenders may hike interest rates on certain loans
Despite the steady repo rate, lenders may increase interest rates on loans linked to the marginal cost of fund-based lending rate. This potential rise is due to incomplete transmission of a 250-basis points hike in the repo rate between May 2022 and February 2023. In April, RBI Governor Shaktikanta Das cited uncertainties in food prices as ongoing challenges that require vigilance from the MPC. RBI also maintained its 'withdrawal of accomodation' stance, with an aim to manage inflation.
Economic performance
India's GDP growth outpaces inflation concerns
India's GDP growth data for FY24 confirmed its position as the world's fastest-growing major economy, with an 8.2% year-on-year growth rate. However, the headline consumer price index (CPI) inflation remains above the RBI's target of 4%. The last quarter of FY24 saw a surprising GDP growth of 7.8%, bolstered by lower subsidies leading to a 22% year-on-year surge in Net Indirect Taxes (NIT).
Inflation challenge
Inflation remains above RBI's target despite GDP growth
Despite robust GDP growth and a likely managed fiscal deficit, inflation continues to exceed the RBI's target of 4%. The central bank remains committed to reducing headline inflation below this percentage sustainably. Retail inflation in India eased slightly to reach an 11-month low of 4.83% annually in April, compared to 4.85% in March.