Decoding RBI’s Monetary Policy: Why The Repo Rate Stayed Unchanged At 6.5%?

During the policy meeting, the Monetary Policy Committee (MPC) remained neutral and opted for continuing the repo rate at 6.50%. Interestingly, even though the most recent CPI figure was nearly 6%, two of the three external members voted for a 25 basis point drop in the repo rate. Given the global economic slowdown, the RBI's decision to maintain the repo rate at its current level for the eleventh consecutive time over a 22-month period is a testament to the economy's strong performance.

This policy decision contributes to market stability at a critical juncture. Given the significance of real estate, which accounts for up to 7% of India's GDP, rate stability may also guarantee development in related businesses. Homebuyers in particular benefit from the repo rate constantly being the same. This is because the current home loan rates have stabilised and are now between 8.5 and 9%, which allows the ordinary buyer to afford the EMIs.

"This step assumes significance in the backdrop of the GDP growth estimated to be 6.6% in FY2025 as against 7.2% projected earlier, and the retail inflation projected to hover at 4.8% for the current fiscal over 4.5% which was projected earlier. For the real estate industry, this is a positive development which will spur home loan enquiries to take advantage of the unchanged interest rates which may increase in the coming quarters. As interest rates have surged from an average of 7.4% in 2020 to 8.5-10% currently, the continuance of repo rates for over 5 quarters will increase homebuyer interest to tap into the prevailing interest rates before it increases further," said Darshan Govindaraju, Director, Vaishnavi Group.

Shows how resilient the Indian economy is in the face of global economic crises for the eleventh time in 22 months. Given that retail inflation forecasts have increased to 4.8% for the current fiscal year from the previous estimate of 4.5% and that GDP growth projections have been reduced to 6.6% for FY2025 from 7.2%, this change becomes even more significant.

"For the real estate sector, this stability in interest rates is a positive signal, likely to encourage a surge in home loan inquiries as buyers look to capitalize on the current rates before potential increases in the coming quarters. With interest rates already climbing from an average of 7.4% in 2020 to 8.5-10% today, the continuation of steady repo rates presents a valuable opportunity for homebuyers to act swiftly and secure more affordable financing," said Mr Angad Bedi, Chairman & Managing Director, BCD Group.

"Though not surprisingly the MPC has decided to keep the repo rate unchanged, it has effectively signaled a pivot to policy easing by cutting the CRR to 4%. This is not only positive for the banking sector as their profits on M-T-M portfolio will improve significantly, it will also support the broader economy by ensuring adequate system liquidity which will see money market interest rates evolving in an orderly fashion. By doing so, the MPC has done a fine balancing act by supporting growth without lowering its inflation vigil," commented Mr. V. P. Nandakumar, MD & CEO at Manappuram Finance.

While tackling constrained banks liquidity issues with a 50-bps CRR drop, the MPC adopts a balanced strategy by maintaining both policy rates and stance constant in the face of a significant slowdown in GDP and persistently high inflation. The forecast is vulnerable to challenges from geopolitical unpredictability, global commodity price volatility, and geoeconomic fragmentation. In light of the ramifications, the initial estimate of 7.2% GDP growth for FY25 has been lowered to 6.6%.