RBI Policy: Surprise pause by MPC, repo rate kept unchanged at 6.5%

The Monetary Policy Committee (MPC) on April 6 chose to retain the repo rate at the same level taking into account the turmoil caused by global banking crisis and the contagion risks.

It maintained  the 'withdrawal of accommodation' stance highlighting the readiness to act should the situation so warrant.

One basis point is one hundredth of a percentage point. The MPC kept the repo rate, or the rate at which it lends short-term funds to banks, at 6.5 percent.

The RBI also raised its GDP growth projection for FY24 to 6.5% from 6.4% earlier. It marginally brought down the inflation forecast for FY24 to 5.2% from 5.3% despite an assumption of crude oil basket for India at $85 per barrel instead of $95 per barrel earlier.

With this, since May, 2022, the RBI has hiked rates by a total of 250 bps as part of the inflation fight. However, the panel noted that inflation worries aren’t fully over yet and the panel will remain cautious ahead. The retail inflation stood at 6.44 percent in February, down from 6.52 percent in January, but stayed above the central bank’s comfort level of 6 percent.

The core inflation remains sticky above the 6 percent mark. Core inflation refers to non-food, non-oil part of the inflation. High inflation is a pain for Indian policymakers as escalating prices snatch away the purchasing power of average households, thus impacting economic recovery on the ground.

The MPC is under pressure in meeting its primary mandate as inflation remained above 6 percent level consistently. Under rules, the MPC will need to submit a report to the government if inflation stays above 6 percent for three quarters in a row, which happened last year.

Some economists had predicted a pause this time, arguing that further hikes in the interest rates could prove to be counter-productive as it may hurt the nascent growth recovery.

In an interview with Moneycontrol in February this year, RBI MPC member Jayanth Varma had said that even the repo rate of 6.50 percent very likely overshoots the policy rate needed to achieve price stability and further tightening is not desirable. Varma said the February rate hike was unwarranted in the context of diminished inflationary expectations and heightened growth concerns. Varma voted against the resolution.

But majority of the MPC members, including RBI Governor Shaktikanta Das and Deputy Governor Michael Patra have been arguing that a pause at this point would be premature.

The MPC's pause in rate hikes came at a time when global central banks are caught in a growth-inflation conundrum. In March, the US Federal reserve announced a quarter point rate hike despite an unfolding banking crisis involving smaller regional banks.