RBI Holds Benchmark Rate Steady at 6.5%: Key Highlights and Economic Implications

On Friday, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) voted four-to-two to keep the benchmark repurchase rate at 6.5%. This decision aligns with the forecasts from all 34 economists surveyed by Bloomberg. The six-member panel also maintained its hawkish policy stance, emphasizing a “withdrawal of accommodation” approach.

Political Context and Fiscal Implications

The MPC’s decision comes on the heels of a smaller-than-expected poll victory for the incumbent government. The party now faces the challenge of forming a coalition government, which could potentially shift its fiscal policies. Economists suggest that the incumbent government might increase welfare spending to secure support, a move that could further fuel inflation.

Economic Growth and Inflation Dynamics

India’s rapid economic growth provides the central bank with the leeway to prioritize price stability. The country’s economy grew by over 8% in the fiscal year ending in March, while inflation stood at 4.83% in April, exceeding the RBI’s 4% target. The RBI raised its growth projection for the fiscal year through March 2025 to 7.2%, up from 7%, and maintained its inflation forecast at 4.5%.

Inflation Risks and Vigilance

RBI Governor Shaktikanta Das highlighted the need for vigilance regarding inflation risks, particularly those related to food prices. Despite timely monsoon rains alleviating some concerns for farmers, a severe heat wave across the country has renewed fears of a price spike.

Market Reactions

Following the announcement, stocks held onto their gains, while sovereign bonds experienced a slight dip. The yield on the benchmark 10-year bond rose by 2 basis points to 7.03%. The Indian rupee remained relatively stable in response to the news.

Future Rate Cut Expectations

Economists do not anticipate rate cuts until the final quarter of the year, projecting that the RBI will likely wait for the US Federal Reserve to make its move first. This cautious approach underscores the RBI’s commitment to managing inflation while supporting economic growth.

Conclusion

The RBI’s decision to hold the benchmark rate steady at 6.5% reflects a careful balancing act between fostering economic growth and controlling inflation. As India navigates political shifts and external economic influences, the central bank remains vigilant in its mission to ensure price stability.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.