RBI Policy: MPC retains repo rate at 6.5%, sounds caution on inflation

RBI

The Reserve Bank of India's Monetary Policy Committee (MPC) on June 8 retained the repo rate, the key short-term lending rate, at 6.5 percent in line with the expectations but sounded caution about a likely uptick in inflation print.

While announcing the decision, RBI Governor Shaktikanta Das also signalled the central bank’s readiness to act in keeping with the incoming data. Since May 2022, the regulator has hiked the repo rate by 250 basis points to counter the inflationary pressure.

One basis point is one-hundredth of a percentage point.

High inflation, which has remained a key concern for policymakers, has begun cooling off in recent months. The retail inflation rate dropped sharply for the second straight month, hitting an 18-month low of 4.7 percent in April, but still stays above the RBI's target of 4 percent.

Economic growth is picking up pace, with the March quarter GDP reading of 6.1 percent beating economist consensus by a wide margin and signalling that the recovery is on track.

The biggest risk to inflation will be El Niño, which can have a bearing on monsoon rains and the trajectory of core inflation in the approaching months. Core inflation has eased of late but still remains above the desired levels of central bank.

While the RBI has largely come to the end of the rate-tightening cycle, the rate-setting panel is expected to remain on the pause mode for rest of the year with a chance of a rate cut if inflation eases on a sustainable basis, economists have said.

A pause is largely a non-event for the banking sector, as interest rates have largely peaked both on loans and deposits. Banks are in no rush to hike deposit rates further due to high deposit accretion following the withdrawal of the Rs 2,000 note, and sufficient liquidity in the banking system, experts said.

Liquidity is in surplus, prompting the central bank to announce auctions to suck out excess money from the system in recent weeks.