RBI holds the repo rate for a fourth straight review

Why in the News

The Reserve Bank of India (RBI) kept its repo rate unchanged at 5.25% for a fourth consecutive Monetary Policy Committee (MPC) meeting. The decision exposes the tension between reviving growth through cheaper credit and defending price stability while inflation sits above target.

What is the Monetary Policy Committee (MPC)?

1. Statutory body: The MPC is the six member committee that sets the benchmark repo rate to keep retail inflation within a legislated band.
2. Mandate: It is tasked with holding Consumer Price Index (CPI) inflation at 4%, within a tolerance range of 2% to 6%.

Why has the RBI chosen to hold rather than cut?

1. Inflation above target: Retail inflation has stayed above the 4% midpoint, removing headroom for a rate cut.
2. Geopolitical spillover: The bank flagged the West Asia conflict and crude price risk as reasons to preserve policy space.
3. External buffer: Protecting foreign exchange reserves and the rupee against capital outflows outranked a growth focused easing.

What are the risks in a prolonged hold?

1. Growth drag: A sustained high rate raises borrowing costs for firms and households and can slow investment.
2. Transmission gap: Banks may not pass rate signals through fully, weakening the policy’s real economy effect.
3. Fiscal friction: Elevated rates raise the government’s own interest burden on fresh borrowing.

Conclusion

The RBI is prioritising price and currency stability over a growth stimulus while inflation remains above target. The next MPC review will turn on whether inflation cools back toward 4% and whether the external environment stabilises.

Back2Basics: Repo Rate

1. Definition: The rate at which the RBI lends short term funds to commercial banks against securities.
2. Function: It is the primary tool of monetary policy transmission; a higher repo rate raises the cost of money and cools demand.

Matching Previous Year Question

“[2017] Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)?
1. It decides the RBI’s benchmark interest rates.
2. It is a 12-member body including the Governor of RBI and is reconstituted every year.
3. It functions under the chairmanship of the Union Finance Minister.
Select the correct answer using the code given below:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 2 and 3 only
Answer: (a)”