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The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has given an important decision regarding the country’s policy interest rates after its three-day intensive review meeting. The central bank, after deeply assessing the macroeconomic conditions, global geopolitical uncertainties and potential risks of domestic inflation, has decided to keep the main policy ‘Repo Rate’ unchanged at 5.25 percent.
While making the policy announcement, the RBI Governor clarified that the Monetary Policy Committee has unanimously voted in favor of keeping the rates unchanged and maintaining its ‘neutral/cautious’ policy stance. This decision has come at a time when there is immense turmoil in the energy markets globally and major central banks are exercising extreme caution in their economic policies. This decision of the Reserve Bank clearly indicates that the Indian banking system is currently maintaining a very fine and balanced balance between accelerating growth and keeping inflation within the prescribed target of 4 percent.
New structure of policy rates and voting pattern: Know the complete system
In this meeting of the Monetary Policy Committee, it has been recommended to maintain all major policy rates at the current level. Since there is no change in the repo rate, other supporting rates related to it will automatically remain stable:
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Policy Repo Rate: Unchanged at 5.25 percent.
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Standing Deposit Facility (SDF Rate): Retained at 5.00 per cent (this is the rate at which banks deposit excess cash with the RBI without any collateral).
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Marginal Standing Facility (MSF Rate): Fixed at 5.50 per cent (the rate at which banks borrow overnight funds from the RBI in case of emergencies).
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Bank Rate: Maintained at 5.50 percent.
A majority of the six-member Monetary Policy Committee, comprising three internal (RBI) officials and three eminent external economists appointed by the central government, voted in favor of keeping rates steady. The Committee believes that the full impact of rate adjustments over the past months is still slowly being transmitted to the economy and the banking system, so keeping rates stable is the most prudent step at this time.
GDP growth and retail inflation outlook: What is the central bank’s economic forecast?
The RBI has also shared its forecasts for the country’s economic growth and consumer price index (CPI)-based retail inflation for the current financial year and upcoming quarters. According to the central bank, the macroeconomic fundamentals of the Indian economy remain extremely strong and resilient:
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Growth rate of gross domestic product (GDP): India’s GDP growth rate is estimated to be in the strong range of 7.0% to 7.2% in the current financial year on the basis of continuous improvement in rural demand, strong performance of the manufacturing sector, continuous expansion in the services sector and huge capital expenditure (Capex) being made by the central government on infrastructure.
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Estimate of Retail Inflation (CPI Inflation): Retail inflation is estimated to be between 4.3% and 4.5% for the entire financial year.
Although core inflation is under control, food inflation (especially pulses, edible oils and seasonal vegetables) and international commodity prices still remain the main sources of uncertainty. The Governor stressed that the central bank will remain on full alert until retail inflation permanently aligns with the set target of 4 per cent.
Global uncertainties and geopolitical pressures: 4 big reasons for not touching rates
International financial and strategic conditions have emerged as the biggest reason behind this cautious policy of RBI. The central bank has highlighted the following four key global risks behind the policy stance:
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Tension in the Middle East and the Hormuz Crisis: The military and diplomatic tensions in the Persian Gulf and Strait of Hormuz region have had a deep impact on the global oil supply chain. Any unexpected increase in Brent Crude and international freight rates increases the risk of imported inflation.
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Policies of the US Federal Reserve and global banks: Global bond yields and capital flows remain volatile due to the data-dependent approach to interest rates being adopted by the US Central Bank (US Fed) and the European Central Bank. If India cuts rates aggressively prematurely, it could lead to capital withdrawal pressure from foreign institutional investors (FIIs) due to reduction in interest rate differential.
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Managing the US Dollar and Exchange Rates: The Indian Rupee (INR) is impacted by fluctuations in the US Dollar Index amid global trade uncertainties. By maintaining policy stability, the Reserve Bank wants to protect the exchange rate of the rupee from external shocks.
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Effect of weather and crop cycle: The central bank needs some more time to accurately assess the impact on the production of Kharif crops and food prices due to uneven distribution of monsoon in different parts of the country, heavy floods in some places and less rain in others.
Impact on loan borrowers and home loan EMIs: Monthly installments will remain stable
Repo rate is the rate at which commercial banks (like SBI, HDFC Bank, ICICI Bank, PNB) borrow from the Reserve Bank of India for their short-term needs. When the repo rate remains constant, there is no immediate change in the cost of funds of banks.
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For Existing Borrowers: Customers who have taken a home loan, car loan or personal loan on a floating rate linked to the External Benchmark Lending Rate (EBLR/RLLR), there will be no increase in their monthly EMI or loan tenure. The installments will remain the same.
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For New Loan Customers: The bank will continue to offer loans at the current competitive interest rates to customers planning to buy a new house or vehicle. However, banks may offer some festive discounts in spreads or processing fees depending on their liquidity position.
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MCLR based old loans: There will be no major change in the old loans which are linked to Marginal Cost of Funds Based Lending Rate (MCLR), because the deposit cost of banks has remained largely stable.
What does it mean for savers and fixed deposit (FD) investors?
The repo rate remaining stable at 5.25% is a relief news for senior citizens, pensioners and common investors who depend on traditional savings. Unless the Reserve Bank starts a series of rate cuts, it is unlikely to make any major cut in the attractive interest rates offered on fixed deposits by commercial banks and non-banking financial companies (NBFCs).
Currently, major banks are offering safe returns of 6.75% to 7.25% to general citizens and 7.25% to 7.75% to senior citizens on medium term FDs of 1 to 3 years. Some small finance banks are even offering interest of more than 8.00% on special term deposits. Financial advisors believe that for investors who want to lock-in their deposits at higher interest rates before possible interest rate cuts in the coming times, this is the right time to invest in long-term FDs or secured debt funds.
Liquidity and financial stability in the Indian banking system
In the policy statement, the Reserve Bank has also expressed deep satisfaction over the health of the country’s financial sector. The Non-Performing Asset (Gross NPA) ratio of Indian banks has fallen to a historic low and the Capital Adequacy Ratio (CRAR) of banks remains well above the regulatory norms.
The central bank has been making regular use of Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) auctions to ensure adequate liquidity in the banking system. The Governor has also reiterated instructions to financial institutions to maintain strict compliance with cyber security, digital lending rules and the quality of unsecured retail loans so that financial stability is not threatened.
Way forward: When can we get relief from interest rate cuts?
Market analysts, corporate world and economists are now keeping an eye on when the central bank will start the cycle of interest rate cuts. Most economic experts estimate that if food inflation comes under complete control in the coming months, good harvest of Kharif crops reaches the mandis and global crude oil prices remain stable, then the Reserve Bank may consider a nominal rate cut of 25 basis points (0.25%) in the coming quarters (especially in the last months of the year or the next monetary review).
Overall, this decision of RBI is a clear evidence of its strategy to take the Indian economy forward on a safe, stable and sustainable growth path while protecting it from global storms. This environment of policy stability will play a decisive role in promoting business investment, maintaining consumer confidence and maintaining the country’s status as the world’s fastest growing major economy.