The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) on October 9 decided to maintain the status quo on the repo rate at the current 6.5 per cent. The repo rate is the interest rate at which the RBI loans money to commercial banks. The central bank decided to hold rates steady despite the US Federal Reserve’s recent rate cut of 50 basis points. While there were hopes for a rate cut in line with the US Fed, the RBI has taken a prudent approach by focusing on key indicators like domestic inflation and financial stability, particularly in light of the declining individual savings as a percentage of GDP, which poses a financial stability risk. The recent global geopolitical developments have led to a surge in oil prices, which could drive inflation further. This perhaps influenced the MPC’s decision to hold rates steady. However, if these global challenges prove temporary, we might see a rate cut in the next policy cycle.
The RBI’s monetary policy committee meeting from October 7 to 9 was watched closely by all those concerned about the country’s economy and also by borrowers. After the US Fed rate cut, all eyes are on the RBI MPC meeting whether it will follow the path shown by the Fed by starting the rate cut cycle or continue to maintain the status quo on both the policy rates and stance. While the recent US Fed cut would have prompted the RBI to follow suit, the fact is that the global economy is facing considerable uncertainty because of the ongoing geopolitical tensions. Amid geo-political uncertainties, the six-member MPC analysed the state of the economy amid tensions in the Middle East. It was a tightrope walk for the RBI and it is, therefore, laudable that it decided to hold on to the current repo rate for now, until these pressures ease.
It is likely that the MPC continued to maintain status quo on the policy rates, since it would like to start the rate cut cycle once it gets convinced that CPI inflation has been controlled in a relatively durable way and it will not be vulnerable to the food inflation fluctuations intermittently. Taking into consideration the current domestic growth inflation dynamics and higher near-term inflation projection, the MPC stayed tuned on extended policy rate hold as immediate easing to support growth. Despite elevated interest rates, India’s economic growth has remained resilient, with consumption indicators such as home sales maintaining robust momentum. This sustained growth provides adequate cushioning for the RBI to keep the repo rate at the existing level of 6.5 per cent. For the real estate market, a cut in the repo rate would result in lower interest rates on home loans, which makes EMIs more manageable for borrowers.
