Headwinds: RBI keeps key rate unchanged, lowers growth forecast
Calls for lowering the repo rate grew louder after the Gross Domestic Product (GDP) growth slowed to a seven-quarter low during July-September of FY25.
The Reserve Bank of India (RBI) left its benchmark interest rate unchanged at 6.5% in this year’s last meeting of its monetary policy committee despite a dip in economic growth, citing continued risks from inflation.
The central bank kept the repo rate steady after raising it by 250 basis points to 6.5% between May 2022 and February 2023. A basis point is one-hundredth of a percentage point.
The government had voiced concerns about higher interest rates amid a slump in growth. “I certainly believe they [RBI] should cut interest rates. Growth needs a further impetus,” Union commerce minister Piyush Goyal said at an event on 14 November. He added it is an “absolutely flawed theory” to consider food inflation while deciding on rates.
A few days later, Union finance minister Nirmala Sitharaman echoed the same view. “At a time when we want industries to ramp up and build capacities, our bank interest rates will have to be far more affordable,” she said on November 18.
The RBI’s Monetary Policy Committee (MPC) voted four to two to keep the repo rate at 6.5% on Friday, citing threats to price stability, especially from volatile food items.
India’s inflation has remained well above the RBI’s 4% target aim, with retail prices galloping to a 14-month high of 6.21% in October.
“MPC believes only with durable price stability can strong foundations be secured for high growth,” RBI governor Shaktikanta Das said in a live-streamed address in Mumbai.
The MPC decided unanimously to retain the stance to “neutral” and to remain unambiguously focused on a durable alignment of inflation with the target while supporting growth, Das said.
Das had previously said a rate cut at this stage would be “very risky” and he was in no hurry to join the wave of easing by global policymakers.
The MPC also lowered the growth target for this fiscal year to 6.6% from 7.3%.
Calls for lowering the repo rate grew louder after the Gross Domestic Product (GDP) growth slowed to a seven-quarter low during July-September of FY25, data released by the statistics and programme implementation ministry showed on November 29.
The repo rate refers to the rate at which commercial banks borrow money by selling their securities to the RBI. The reverse repo rate is the rate at which the central bank borrows money. These rates are key to boosting credit and investments by businesses to boost economic growth. An increase makes borrowing expensive for businesses, limiting money supply and cooling inflation – the key objective of why banks raise benchmark rates.
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