06-Apr-2023
2 mins read
RBI Hits Pause on Repo Rate Hike: A Temporary Break Amidst Rising Inflation and Economic Uncertainties
After six consecutive hikes, the Reserve Bank of India (RBI) has kept the policy repo rate unchanged at 6.5%. RBI Governor Shaktikanta Das announced this decision after the latest monetary policy committee meeting. Despite persistent core inflation, the central bank has temporarily paused rate hikes, citing “unprecedented uncertainties in geopolitics and economy.”
A Pause for Now, but Future Hikes Remain a Possibility
While the decision to maintain the repo rate may surprise some, Governor Das emphasized that this pause is “for this meeting only.” The RBI will continue to focus on withdrawing monetary policy accommodation and will not hesitate to take action if necessary. This indicates that future rate hikes may remain on the table as the central bank closely monitors the evolving economic landscape.
India’s Economic Resilience and Growth Projections
Despite the challenges posed by global economic uncertainties, India’s economic activity has remained resilient. Governor Das announced that real GDP growth is expected to reach 7% in FY23. Furthermore, the RBI has slightly raised its GDP growth projection for the next fiscal year to 6.5% from the previous estimate of 6.4%.
Addressing Inflation and Current Account Deficit
The decision to unchanging the key lending rate unchanged was made based on an assessment of the current macroeconomic financial and macroeconomic conditions. Governor Das assured that the “war against inflation will continue until a durable decline in inflation closer to the target is seen.” India’s current account deficit for the first three-quarters of FY23 is at 2.7% of GDP, and it is expected to remain moderate in the fourth quarter as well.
Market Reactions to the RBI’s Decision
Indian government bond yields experienced a significant drop on Thursday after the RBI’s unexpected decision to maintain policy rates. Prior to the announcement, in early trade, the rupee depreciated by 5 paise to 81.95 against the US dollar. The domestic unit opened weak at 81.95 against the dollar, registering a decline of 5 paise over its last close.
The Role of Repo Rate in Controlling Inflation
The RBI aims to control inflation by making borrowing more expensive through repo rate hikes, which in turn slows down money supply and investment in the market. Inflation in India has been above the RBI’s tolerance limit of 6% for two consecutive months since January. In February, retail inflation stood at 6.44%, compared to 6.52% in the previous month.
Repo Rate Increases Since May 2022
In early February, the RBI raised the repo rate by 25 basis points to 6.5% in the last MPC meeting. Cumulatively, the central bank has raised the repo rate by 250 basis points since May 2022. The Das-led MPC began its new financial year with meetings on the 3rd of April, 5th of April, and 6th of April for the first bi-monthly review.
The central bank conducts six bi-monthly monetary policy reviews each year, with additional out-of-cycle reviews during times of emergency.
