RBI Maintains Interest Rate, Signals Possible Cuts Ahead

Why in the news?

The RBI keeps the interest rate at 6.5% but shifts to a “neutral” stance, indicating potential rate cuts amid balanced inflation and growth parameters.

RBI Maintains Interest Rate, Signals Possible Cuts Ahead

RBI Maintains Interest Rate

  • Current Rate: The Reserve Bank of India (RBI) has kept the benchmark interest rate at 6.5% for the tenth consecutive monetary policy review.
  • Policy Stance Shift: The Monetary Policy Committee (MPC) has shifted its stance from “withdrawal of accommodation” to “neutral,” indicating a potential for future rate cuts.
  • Committee Consensus: The decision to maintain the interest rate was supported by five out of six MPC members during the three-day meeting that began on October 7.

Macroeconomic Assessment:

  • Balanced Parameters: The MPC noted that the macroeconomic indicators for inflation and growth are currently well balanced.
  • Inflation Outlook: Governor Shaktikanta Das emphasised that while retail inflation had been under the target of 4% in July and August, it may rise again in September due to adverse base effects.
  • Monitoring Required: Das highlighted the need for vigilance regarding inflation, using an analogy of keeping a “horse” (inflation) under tight control to prevent it from bolting.

Growth Projections:

  • GDP and Inflation Estimates: The RBI maintained its GDP growth projection at 2% and average inflation estimate at 4.5% for 2024-25, with adjusted second-quarter inflation projections lowered to 4.1%.
  • Growth Momentum: The Governor noted sustained domestic growth, driven by private consumption and investment, allowing the RBI to focus on bringing inflation down to the target.
  • Risks to Inflation: Unexpected weather events and geopolitical conflicts are identified as potential risks that could increase inflation.

What is the Monetary Policy Committee (MPC)?

  • Formation: Constituted under Section 45ZB of the amended RBI Act, 1934; first formed in September 2016.
  • Members: Comprises six members:
    • RBI Governor (ex officio chairperson)
    • Deputy Governor in charge of monetary policy
    • An officer of the Bank (nominated by Central Board)
    • Three persons appointed by the central government.

Functions of MPC

  • Setting Policy Interest Rates: Determines the repo rate, which influences borrowing costs.
  • Inflation Targeting: Aims for a CPI inflation target of 4%, with a tolerance band of +/- 2%.
  • Economic Analysis and Forecasting: Analyses economic indicators like inflation, GDP growth, and employment.
  • Decision-Making: Meets at least four times a year to review monetary policy.

Sources Referred:

PIB, The Hindu, Indian Express, Hindustan Times