RBI Monetary Policy; Central Bank Holds Interest Rates Steady

The Reserve Bank of India today surprised the markets and economists by keeping the repo rate steady at 5.15 per cent. Most analysts had expected the RBI to cut repo rates by 25 basis points.

Repo rates are interest rates at which the RBI lends money to commercial banks in the country. The Monetary Policy Committee, which has been meeting since early this week, decided to hold rates steady.

RBI Monetary Policy; Central Bank Cuts Interest Rates By 25 Basis Points

"The decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the RBI said in a release.

Retail inflation, measured by y-o-y changes in the CPI, increased sharply to 4.6 per cent in October, propelled by a surge in food prices. Fuel group prices remained in deflation, while inflation in CPI excluding food and fuel moderated further from its level a month ago.

All members of the MPC - Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H.Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das - voted in favour of the decision.

Unlikely to have a great impact on growth rates

The past cut in interest rates have not had a great impact on economic growth rate, as this monetary tool hardly seems to be working. In fact, despite seeing 5 previous interest rate cuts, growth rates have slumped to a six year low.

The real worry for the RBI after previous interest rate cuts, would be the fact that inflation is once again rearing its head. In fact, for the month of Oct, retail inflation spiked above the RBI's comfort zone of 4 per cent, inching higher to 4.62 per cent.

A higher forecast for inflation means the RBI is likely to put a lid on further cut in interest rates. Most analysts today had anticipated the cut in repo rates and the same was on expected lines.

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