RBI keeps repo rate unchanged at 6.5%, cites food-inflation risk
The RBI continued with its policy stance of “withdrawal of accommodation” to ensure inflation is in step with its target of 6%(+/-2) while supporting economic expansion
The Reserve Bank of India (RBI) on Thursday kept its benchmark repo rate unchanged at 6.5% for the sixth straight time, staying focused on anchoring inflation and boosting growth. It cited food-price inflation as a continuing risk.
The RBI continued with its policy stance of “withdrawal of accommodation” to ensure inflation is in step with its target of 6%(+/-2) while supporting economic expansion. In other words, the RBI will be focussed on curbing the money supply in the economy to control inflationary pressures.
“Uncertainty in food prices continues to impinge on headline inflation,” RBI governor Shaktikanta Das said at a briefing in Mumbai. Monetary policy will remain actively “disinflationary”, he said.
If the monsoon turns out to be normal, consumer inflation for FY25 is seen at 5%, the RBI said, while it projected retail inflation to be 5.4% for 2023-24, with Q4 at 5%.
A continued uptick in manufacturing activity, buoyancy in construction, and a recovery in the rural sector will hold up household consumption, the RBI said. Taking this into account, it forecast real GDP growth for FY25 at 7%, with Q1 at 7.2%, Q2 at 6.8%, Q3 at 7% and Q4 at 6.9%.
The risks of high food prices continue to key be variables to watch that can alter the course of inflation. The global economy remains fragile due to elevated debt levels, lingering geopolitical tensions, and extreme weather conditions, Das said.
The central bank hiked the repo rate by 250 basis points to 6.5% between May 2022 and February 2023. It then hit a pause in the April review of the monetary policy. A basis point is one-hundredth of a percentage point.
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. A hike makes borrowing expensive for businesses, limiting money supply and cooling inflation – the key objective of why banks hike benchmark rates.
Das has consistently warned of risks to food prices. India is vulnerable to food-price shocks from extreme weather events and global factors despite a recent moderation in prices, he said on November 22. This was the RBI governor’s second warning in a month about the risks of food inflation.
In a speech in Japan on November 8 last year, Das said the RBI saw risks from “recurring and overlapping” food-price shocks.