RBI keeps repo rate unchanged at 6.50% 

The Reserve Bank of India's (RBI) key lending rate was unchanged for a third straight policy meeting on Thursday, as widely expected, as inflation concerns resurfaced following higher-than-usual seasonal rise in food prices in recent weeks.

The monetary policy committee (MPC), consisting of three members from the central bank and three external members, kept the repo rate unchanged at 6.50 per cent in a unanimous decision. Five out of six members of the RBI MPC voted in favour of the decision.

Since May 2022, the rates have been raised by 250 basis points (bps) by the government in a bid to cool surging prices.

Decision taken unanimously

Governor of RBI Shaktikanta Das said while announcing the bi-monthly monetary policy, that the MPC decided to keep the rate unchanged at 6.5 per cent, adding that it will remain watchful of the inflation and remains resolute to its commitment to align inflation to the targeted level.

While keeping the interest rates steady, headline inflation still remains above RBI's threshold of 4 per cent, Das said.

Inflation concerns 

Food price hikes in the country, typical at the onset of the monsoon, drove up headline inflation in June, snapping a four-month downward trend. Analysts expect it to have reached 6.4 per cent in July, moving out of the RBI's 2 per cent-6 per cent comfort band.

The hawkish stance of the central bank was reinforced by the unexpected announcement of a cash reduction in the banking system by hiking the incremental cash reserve ratio (ICRR) to 10 per cent over the last three months. This would lead to absorbing a large part of the excess liquidity created through the return of Rs 2,000 notes and the large dividend to the government from the RBI.

The move will likely suck out around Rs 1 lakh crore from the banking system, and the liquidity tightening measure will not impact the credit needs of productive sectors, said Das.

"The job on inflation is still not done; inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions, and weather-related uncertainties," Das said. 

Forecast  

The central bank hiked its inflation forecast for the current financial year to 5.4 per cent from 5.1 per cent earlier amid food price pressures. The July-September quarter saw inflation at 6.2 per cent, higher than the 5.2 per cent forecasted earlier.

"We do look through idiosyncratic shocks, but if it shows signs of persistence, we have to act," he said, detailing the decision of the MPC meeting here.

The MPC expects a seasonal correction in food prices in the fourth quarter of 2023.

Economic growth

The projection for economic growth was retained at 6.5 per cent for FY24.

"Aggregate demand conditions continue to be buoyant," Das said.

"While the vegetable price shock may reverse quickly, possible El Nio weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory," he said.

"Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4 per cent," Das said.

Transparent framework and UPI

A proposal for a transparent framework for the reset of interest rates on floating-interest loans was also put forward to provide borrowers with options for switching to fixed-rate loans or foreclosing on loans.

The central bank allowed 'conversational payments' on UPI. The move will enable users to engage in conversation with AI-powered systems to make payments and also introduce offline payments on UPI using Near Field Communication (NFC) technology through the UPI-Lite' on-device wallet and enhance the transaction limit for small value digital payments in offline mode from Rs 200 to Rs 500 within the overall limit of Rs 2,000 per payment instrument.

(With PTI inputs)