RBI maintains repo rate at 6.5% amid inflation, growth concerns
What's the story
The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has opted to keep the repo rate unchanged at 6.5% for the 11th consecutive meeting.
The decision was swayed by persistent inflation concerns and an uncertain growth outlook.
The central bank has maintained its 'neutral' stance, first adopted in the October meeting, moving away from its previous 'withdrawal of accommodation' stance.
Inflation concerns
RBI's inflation outlook and growth prospects
RBI Governor Shaktikanta Das, while announcing the decision, emphasized the bank's hawkish approach toward inflation owing to stubbornly high food prices.
However, despite these concerns, the RBI is optimistic about India's growth prospects. This optimism is driven by favorable monsoon seasons and an anticipated revival in capital expenditure.
The decision to hold the rate comes amid demands from government officials and economists to cut borrowing costs.
Rate stability
No immediate rate cuts due to inflation
Despite pressure from Finance Minister Nirmala Sitharaman and Commerce Minister Piyush Goyal over high borrowing costs, Governor Das dismissed any immediate rate cuts.
This is mainly because inflation continues to remain above the RBI's target of 4%. Retail inflation in October stood at a 14-month high of 6.21%.
Today's MPC meeting is significant as it will be Governor Das's last policy review before his term ends on December 10, 2024. It remains unclear if he'll be given an extension.
GDP concerns
RBI's restrictive policies and economic activity
Recent data indicating a sharper-than-expected decline in second-quarter GDP growth to 5.4% has sparked fears that the RBI's restrictive policies could be affecting economic activity.
Analysts expect the RBI to revise its annual GDP forecast downward from the current 7.2%. Goldman Sachs, for instance, has already revised its projection to 6%, down from 6.4%.
Policy challenges
RBI's policy decisions complicated by capital outflows, rupee pressure
The RBI's policy decisions are further complicated by rising capital outflows and rupee pressure.
Any interest rate cuts could worsen pressure on the local currency by narrowing the rate differential between India and the US.
Further, liquidity conditions remain tight due to RBI's extensive forex interventions and a decrease in banking system's surplus liquidity.
To ease these pressures, economists predict RBI may lower Cash Reserve Ratio (CRR), indicating a potential shift toward a more accommodative monetary stance.