The Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC), which is scheduled to meet from February 6 to 8, is expected to keep the repo rate unchanged for the sixth consecutive time at 6.5 per cent to meet the 4 per cent consumer price-based inflation (CPI) target.
What is Monetary Policy Committee?
The Monetary Policy Committee(MPC) is a committee constituted by the Central government and led by the Governor of RBI. MPC was formed with the mission of fixing benchmark policy interest rate(Repo Rate) to restrain inflation within the particular target levels.
Monetary Policy is the process of regulating the supply of money in an economy by the monetary authority of the country. The RBI controls the monetary policy in conjunction with the central government’s developmental agenda.
What is Repo Rate and it’s impact on the economy?
Repo Rate or Repurchase Rate is referred to as the rate at which the central bank(RBI) lends money to the commercial banks for meeting short-term fund requirements in order to maintain liquidity and control inflation.
In situations of increased repo rate, the banks need to pay higher interest to RBI in order to avail funds, while in terms of lower repo rate, the cost of borrowing of funds remain less.
In terms of high inflation: The RBI regulates the flow of money in the economy by increasing the repo rate, which results in fewer borrowings by the business and industries. The result of this, is slowing down money supply and investment activities in economy, which is a significant step to control inflation.
To increase money supply: RBI eases the repo rate so that business can borrow money for investment purposes, which results in more liquidity in the market.
Why is RBI keeping the Repo Rate unchanged?
The repo rate has remained stable at 6.5% for almost a year with the last rate hike occurring on February 2023. Retail Inflation however, within the RBI’s haven is still near the higher end of it’s range.
Given the heels of the interim budget which maintained the status quo on policy front, the Reserve Bank is likely to continue with the pause on short-term lending rate in it’s upcoming bi-monthly monetary policy this week, as the retail inflation is still near the higher end of it’s comfort zone, says experts.
The RBI has been maintain that it’s aim to bring CPI inflation to 4 per cent, and until that is achieved on a sustainable basis, it’s focus will be to remain disinflationary.
In December, CPI Inflation, or retail inflation surged to a four-month high of 5.69 per cent driven by higher prices of food items such as pules, spices, fruits and vegetables. In November 2023, CPI stood at 5.55 per cent.
Altough headlines inflation has come within the 2 -6 per cent band set by the government for the RBI, it still remains above the 4 per cent target.
Madan Sabnavis, Chief Economist, Bank of Baroda, said the MPC is likely to maintain an unchanged approach in terms of both rate and stance. “This is so as inflation, as per the December data is still high and there are pressures on the food side, this is not withstanding the fact that core inflation has come down”, he said.
“While financial markets will be closely watching the (RBI) Governor’s comments and the RBI’s actions on liquidity, we think that liquidity will continue to be actively managed by the RBI consistent with the monetary policy stance of ‘withdrawal of accommodation’,” Goldman Sachs said.
Kaushik Das, Chief Economist, India & South Asia, Deutsche Bank stated ,“While significant progress has been made on the core inflation front, we think the upcoming February 8 monetary policy meeting may be too early for the RBI to make any changes to the existing monetary policy stance, particularly given that the (US) Fed remains noncommittal at this stage as to when to start its own easing cycle,”
What happens to lending rate if Repo Rate remains unchanged?
If the RBI decides to keep the Repo Rate unchanged 6.5%, it means they're not making it higher or lower. So, if you have a loan where your interest rate is directly tied to the repo rate (called external benchmark lending rates or EBLRs), your interest rate won't go up.
This is good news for borrowers because it means their monthly payments (EMIs) won't increase.
However, some loans are linked to a different rate called the marginal cost of fund-based lending rate (MCLR). For these loans, the interest rates might still go up, even if the repo rate doesn't change. Because banks might decide to increase the interest rates on these loans themselves, especially if they haven't fully passed on previous increases in the repo rate.
In the past, when the RBI increased the repo rate by 250 basis points (bps) between May 2022 and February 2023, banks also increased their EBLRs by a similar amount.
But for loans tied to MCLR, the increase wasn't as much. This meant that the overall interest rates on loans went up, affecting both new loans and existing ones.
So, in simple terms, if the RBI keeps the repo rate the same, loans tied directly to it won't see an increase in interest rates. However, loans tied to other rates might still see an increase, depending on what banks decide to do.
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