The Reserve Bank of India [RBI] today kept its benchmark policy repo rate unchanged at 6.5% for the second time, after it first announced a pause on its rates in its April statement. The pause in April came after six bi-monthly rate hikes since May 2022.
There was unanimous voting for the move at the bi-monthly meeting by the six-member Monetary Policy Committee on the back of easing retail inflation, which hit an 18-month low. The consumer price inflation (CPI) has eased to 4.7% in April. However, Governor Shaktikanta Das said that headline inflation remains above the tolerance band.
"Let me re-emphasise that headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4.0 per cent, going forward", he said, in a sign that going forward, the RBI did not rule out more rate hikes.
Headline inflation is a broader gauge of inflation and includes food and energy inflation.
The pause in the rate hike also takes peoples' inflationary expectation into account, with the RBI stating that surveys on inflationary expectations from households has tempered 60 to 70 basis points since September 2022.
Moreover, on May 19, the RBI announced that it was withdrawing the ₹2000 banknote. People could either exchange it or deposit it with the banking system.
Experts believe this to be a factor too in the pause in the rate hike cycle, given the liquidity that would soon find its way into the banking system that would be needed to be lent out. Banks too are not expected to increase their lending rates.
The cycle of rate hikes started last year, when on May 4, Das announced a hike in the policy repo rate for the first time. Since then, five more rate hikes have followed, increasing the policy repo rate by 250 basis points or 2.5 percentage points.
These interest rate hikes were aimed to counteract inflation as a quantitative tool by subduing demand, trying to make lesser money chase the same amount of goods. Raising policy rates makes it more expensive to borrow and incentivises savings. Banks link the repo rate to several long-term credit products, especially home loans, making it costlier to borrow. But they also sweeten medium to long-term saving products, like fixed deposits through increased interest rates.
The rate hike cycle started in early to mid 2022 by central banks around the world to normalise COVID-19 pandemic era special monetary policy action and to counter the associated inflation. However, quite like the RBI's recent moves to pause interest rate hikes, central banks globally are also seeing inflation rates in their countries temper and are simultaneously pausing their rate hike progression too.
The RBI has kept its growth rate estimate for this financial year unchanged for the ongoing fiscal year unchanged at 6.5%. Last year's growth rate exceeded expectation at 7.2%.
The Governor also made several consumer-facing regulatory announcements, as is often done in the MPC announcements.
First, the RBI extended a deadline for urban co-operative banks to meet priority sector lending targets by two years to 2026. These sectors include those of social importance such as education, renewables and agriculture.
Second, it allowed providers of non-bank prepaid instruments to issue e-RUPI vouchers which are a medium through which recipients of social security schemes receive their benefits. These are digital or QR code based vouchers issued to beneficiaries which can be only redeemed for specific purposes.
Lastly, the RBI announced that banks would be able to issue forex card on homegrown payments network provider RuPay. It also allowed RuPay cards to be issued in foreign jurisdictions.
Read all the announcements here.