RBI Monetary Policy 2024: Repo Rate Remains at 6.5%, Focus on Inflation Management

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) opted to hold the repo rate unchanged at 6.5% for the eighth consecutive time in their June 2024 meeting. This decision marks the first policy announcement since the recent Lok Sabha election results.

Key Takeaways of RBI Monetary Policy meeting:

• Repo Rate Remains Stable: The MPC's decision keeps borrowing costs for banks unchanged, potentially providing some relief to borrowers with existing loans linked to the repo rate. However, interest rates on loans linked to the marginal cost of fund-based lending rate (MCLR) may still see adjustments.

• Brighter Growth Outlook: The RBI Governor, Shaktikanta Das, revised the GDP growth projection for FY 25 upwards to 7.2%, reflecting a more optimistic outlook for the Indian economy. This revision comes in at 0.2% higher than the previously estimated 7%.

• Stock Market Cheers: Investors reacted positively to the news, with the Sensex experiencing a significant rise of nearly 1% (over 700 points) to reach the 75,814 level soon after the policy announcement.

Inflation and the Repo Rate Decision

The Reserve Bank of India RBI is mandated by the government to maintain Consumer Price Index (CPI) inflation around 4%, with a tolerance range of 2% on either side. In April's MPC meeting, the Committee prioritized controlling inflation and adopted a "withdrawal of accommodation" stance. This move aimed to gradually reduce the liquidity injected into the economy during the pandemic.

Governor Das, while explaining the rationale behind the unchanged repo rate, highlighted the ongoing challenges posed by food price uncertainties. The MPC remains cautious about potential inflationary risks that could disrupt the current disinflationary trend.

Governor Das' Analogy: "Two years ago, around this time, when CPI inflation had peaked at 7.8% in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis."

Industry Reactions

Industry experts welcomed the RBI's cautious approach. Adhil Shetty, CEO of Bankbazaar.com, commended the decision to maintain vigilance on inflation while acknowledging the positive GDP growth forecast. He also cautioned borrowers about potentially continued high interest rates and advised monitoring fixed deposit (FD) rates, which may rise as banks strive to attract more deposits.