Is Repo Rate At 6.5% For Ninth Time In a Row, Historical? You Will Be Surprised...

The Reserve Bank of India (RBI) keeps the policy repo rate at 6.5% for the ninth time in a row on August 8. The decision for a status quo received a majority vote of 4 MPC members including that of Governor Shaktikanta Das, compared to 2 members who voted for a 25 bps rate cut. Is this a historical movement by RBI?

The reason why RBI has paused the key rate at 6.5% for nine consecutive monetary policies, is because the six-member MPC believes in the need to continue with the disinflationary stance until the durable alignment of the headline CPI inflation with its target of 4%.

Currently, India's consumer price index (CPI) inflation print shot up to 5.08% in June 2024, hitting a four-month high, but staying below RBI's upper tolerance limit of 6%. The risk to inflation persists due to elevated food prices momentum.

Apart from the repo rate, RBI has also maintained its monetary policy stance to ' withdrawal of accommodation' to ensure that inflation progressively aligns with the target, while supporting growth.

RBI is an inflation trajectory central bank and its policy decisions around CPI. A rate hike scenario occurs when inflation is rising stubbornly, while a rate cut scenario is favourable when inflation is well in the range of RBI's target. There are times when RBI does not make any changes in key interest rates to gauge their impact on the financial market.

One such momentum is currently. To observe the impact of their aggressive 250 bps hike between May 2022 to February 2023 on businesses and the financial market, RBI has been keeping the repo rate unchanged from April 2023 policies to date.

However, this is not a historical move by RBI, there have been many occasions in the past where India's central bank has opted for the status quo for a longer duration.

For instance, RBI kept the repo rate unchanged at 4% from May 22, 2020, to April 8, 2022, which was for 12th consecutive monetary policy.

Meanwhile, the historical status quo of RBI was during the Great Recession period of 2006-2008 when the world economy was teetered especially in the United States and Europe. In Western developed nations, there was extreme market rout, with domestic product prices tumbling, while unemployment more than doubled, and home prices took the worst hit.

From July 25, 2006, to December 1, 2008, RBI kept the repo rate unchanged at 7%. However, this is not the highest repo rate in India.

The record-high repo rate was 14.5% on August 16, 2000. While the lowest was 4% during the pandemic.

What is ahead after RBI's latest policy?

RBI has a lot of room to choose between status quo or rate cuts in the upcoming policies.

According to Dr Manoranjan Sharma, Chief Economist at Infomerics Ratings, the Medium-term global growth outlook is marred by "demographic shifts, climate change, geopolitical tensions and fragmentations, rising public debt and new technologies (e.g., artificial intelligence)". The domestic scenario is characterised by a resilient macro-economy and moderating inflation but uneven and slow disinflation. In view of contextually significant "multiple challenges", the inflation forecast for FY25 was retained at 4.5 % and the growth forecast at 7.2 % in FY25.

Further, Sharma said that this decision was entirely in line with their expectations and indeed those of most participants in the financial market. Playing with a straight bat, the MPC's stance in the August Policy with a 4:2 majority continued to be "withdrawal of accommodation" and the Repo Rate (last changed in February 2023) was kept unchanged for the ninth consecutive time to continue, as the Governor stressed, "with the disinflationary stance of withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth". This was justified because, despite continuously declining core inflation, retail inflation breached the 5 % mark in June 2024 (a five-month high of 5.08 % in June 2024) and persistently elevated food inflation causes concern, particularly to the vulnerable sections of society. Given the evolving situation, the RBI did well to be in a wait-and-watch mode.

Meanwhile, Sujan Hajra Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers said, a key point to note is his emphasis on food inflation and the fact that MPC was willing to look through it in case it will transitory but as recent experience has suggested, food prices have remained elevated for too long and given a 46% weight in the CPI basket, this component cannot and should not be ignored. High food inflation with its tendency to spill over to core inflation and un-anchor inflation expectations as has happened post-Nov '23 remains the primary concern keeping RBI unhinged. All this in the backdrop of robust economic growth momentum with Indian PMI's remaining one of the highest amongst major global economies suggests MPC is not too worried about rates restricting growth. This can further be observed as the central bank kept its forecasts for rates unchanged at 7.2% for FY25.

Additionally, Anitha Rangan, Economist, Equirus said that overall according to RBI, the pace of inflation is moderating but the moderation is uneven and slow. Therefore patience is required. Rangan added RBI continues to bat for patience as domestic inflation is slowly but steadily trending towards the 4% target. In addition, global volatility, and geo-politics add to the challenges that keep RBI on watch. RBI cannot afford the slightest error of judgement - perhaps the action of BoJ has put RBI under a bigger guard. Another spanner around deposit challenges from banks also means RBI is not in the mood to cut rates in the near term. Stay patient, stay put, and policy rates to remain steady for longer.

Further, Manish Chowdhury, Head of Research, StoxBox said, with more clarity on FY26 inflation and GDP growth trajectory going ahead, we expect the RBI to initiative dovish stance from Q3FY25 and a probable rate cut in Q4FY25.