Monetary Policy: RBI Keeps Interest Rates Unchanged At 6.5%

The Reserve Bank of India (RBI) today left repo rates unchanged at 6.50%, largely in line with expectations. Repo rates are interest rates charged by the Reserve Bank of India when lending to banks in the country - a tool that helps the country's central bank fight inflation. Over the last 1-year, the RBI has been looking to fight elevated inflation levels and has hiked the repo rate as much as 250 basis points or 2.5% since Feb 2022.

"The MPC also decided by a majority of five out of 6 members to remain focused on withdrawal of accomodation," Shaktikanta Das, the RBI Governor stated while announcing the Monetary Policy.

The prime reason to keep interest rates on hold in today's policy was on account of easing inflation expectation from the country's central bank. In fact, since the last policy of April 2023, consumer price index-based inflation has declined to an 18-month low of 4.7% in April 2023 from 5.7% in March 2023. Anchoring inflation expectations remains one of the top mandates of the RBI's Monetary Policy Committee on rates, which decided to hold interest rates steady on easing inflation.

"In its upcoming MPC meeting, we expect the RBI to keep the repo rate unchanged at 6.5%, continuing with a pause, as inflation, supported by statistical base has moderated, and will likely remain so. This provides enough support for the RBI to keep its key policy rate unchanged," Shishir Baijal- Chairman and Managing Director, Knight Frank India told Goodreturns.in a few days before the policy.

Going ahead, the RBI may continue to hold rates steady through the year and cut rates at the beginning of next year. However, that would also depend on incoming data for inflation, which is at the moment looking to trend even lower.

"It is a pause, and the possibility of the next move being a cut is far higher than that of a hike. Growth remains resilient and the inflation while moderating now, could rise in the future as labour market remains tight and wage-inflation spiral remains a distinct danger. Australia and Canada have raised rates after a pause. We are not out of the woods yet. Liquidity surplus will have to be reduced as Rs.2000 notes seep into the banking system liquidity. It is quite possible that market yields rise by a few basis points as RBI waits for more economic cues amidst continued global contradictory cues on inflation and growth fronts," says Sandeep Bagla, CEO Trust Mutual Funds.

Over the next 1-year, it is highly possible that interest rates on fixed interest beraing instruments like bank FDs and interest rates on loans may drop.