Central banks typically raise or decrease key lending rates largely based on how it thinks inflation will pan out in the future and not on price levels witnessed in the past
The Reserve Bank of India (RBI) on Thursday kept its benchmark repo rate unchanged at 6.5% and also did not alter its monetary policy stance, despite anticipation that July’s inflation print will be high due to a spurt in food prices. This is the third time in a row that the bank has held the policy rate steady.
RBI governor Shaktikanta Das said the central bank’s successive policy rate hikes, a reference to increases in interest rates, “seems to be working”, after a two-day meeting of the bank’s six-member monetary policy committee.
The monetary policy however remains focussed on “withdrawal of accommodation”, the governor said. In other words, the RBI will be focussed on curbing the money supply in the economy to control inflationary pressure.
High cereal prices in July and the threat of El Nino, a weather pattern whose effects ripple around the globe, continue to key be variables to watch that can alter the course of inflation.
The central bank hiked the repo rate by 250 basis points to 6.5% between May 2022 and February 2023, the RBI hit a pause in the April review of the monetary policy. A basis point is one-hundredth of a percentage point. The repo rate refers to the rate at which commercial banks borrow money by selling their securities to the Reserve Bank, while the reverse repo rate is the rate at which the central bank borrows money.
These rates are key to boosting credit and investments by businesses to boost economic growth. A hike makes borrowing expensive for businesses, limiting money supply and cooling inflation – the key objective of why banks hike benchmark rates.
Headline consumer prices rose in June and are expected to further rise in July and August on the back of higher vegetable prices, Das said at the end of the policy meeting in Mumbai. “The developments require heightened vigil on evolving inflation trajectory,” he said.
The decision to hold the repo rate steady suggests that the RBI sees high vegetable inflation as transient. “Domestic economic activity holding up well, likely to retain momentum. India’s monetary policy committee has decided to be watchful of evolving situations.”
The majority of bets among polled economists ahead of the central bank’s second bi-monthly monetary policy decision of FY24 were on a pause in repo rate.
