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Why has RBI policy panel kept repo rate unchanged, hiked GDP growth projection?


From UPSC perspective, the following things are important :

Prelims level: Monetary Policy Committee (MPC)

Mains level: Why Did the RBI Keep the Rates Unchanged?

Why in the news?

The RBI’s Monetary Policy Committee kept the repo rate at 6.5% for the eighth consecutive time, due to persistent high retail inflation from sticky food prices.

Monetary Policy Committee (MPC) 

  • The Monetary Policy Committee (MPC) of India is responsible for setting the benchmark interest rate in the country.
  • The committee consists of six members: the Governor of the Reserve Bank of India (RBI), the Deputy Governor in charge of monetary policy, an Executive Director of the RBI, and three external members nominated by the government.
  • The MPC meets at least four times a year and publishes its decisions after each meeting. The committee’s primary objective is to maintain price stability while considering the goal of economic growth.

Why did the RBI keep the Rates Unchanged?

  • Inflation Concerns: The Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.5% due to persistent high inflation, with April 2024 retail inflation at 4.83%.
  • Caution on Food Inflation: The policy stance remains cautious due to the risk of rising food inflation from heatwave conditions, which may impact the final journey of disinflation.
  • Flexible Inflation Targeting: Under the regime, the RBI aims to keep inflation within the 2-6% range and achieve a 4% target on a durable basis.
  • Supply Side Disruptions: Persistent supply shocks in cereals, pulses, spices, and vegetables contributed to elevated food inflation, impacting overall inflation management.

What happens to Lending Rates if the Repo Rate is left steady?

Lending Rate:

The lending rate, also known as the bank rate, is the rate at which commercial banks borrow money from the central bank without securities. It is typically higher than the repo rate and is used for longer-term lending. The lending rate is used to assess the long-term monetary goals of a bank and is often used to manage liquidity in the system

Repo Rate 

The repo rate, on the other hand, is the rate at which the central bank lends money to commercial banks against government securities as collateral. It is used for short-term lending and is typically lower than the lending rate

  • Relief for Borrowers: With the repo rate steady at 6.5%, external benchmark lending rates (EBLR) linked to the repo rate will not increase, keeping equated monthly installments (EMIs) on home and personal loans unchanged.
  • Potential MCLR Increase: Lenders might raise interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR), as the full transmission of the 250 basis points hike in the repo rate from May 2022 to February 2023 has not yet occurred.

Why Has MPC Hiked GDP Growth?

  • Improving Demand: The MPC raised the GDP growth forecast for FY25 to 7.2% from 7% due to strengthening rural and urban demand conditions buoyed by favourable monsoon forecasts.
  • Robust Economic Activity: Indicators such as healthy growth in the eight core industries, strong Purchasing Managers Index (PMI) in manufacturing and services, and overall resilient domestic economic activity support the upgraded growth projection.
  • Sectoral Strength: The manufacturing and services sectors continued to exhibit robust performance, with the PMI for services standing at 60.2 in May 2024, indicating strong expansion.

Conclusion: The RBI’s cautious approach to keeping rates steady while boosting GDP growth projections aims to balance economic growth and inflation control, with a focus on addressing persistent food inflation.

Mains PYQ:

Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC IAS/2019)

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