The RBI maintained the repo rate unchanged at 6.5% for the 11th consecutive time. Now, this is a significant decision, as most people were expecting that the RBI would reduce the repo rate. Why did the RBI not do that and what does it say about the Indian economy’s stability under the current monetary policy committee? Let’s break down some important points about this decision.
1. What is the prevailing repo rate announced by RBI?
Now let us understand what repo rate is. Repo rate is the interest rate at which the central bank, RBI, provides short-term finance to the commercial banks of India.
If RBI prescribes a high repo rate, borrowing from the central bank is costly for the commercial banks. In turn, the banks decrease their borrowing, which increases the interest rate for the consumer. Hence, it is essentially an instrument to regulate inflation and economic growth.
As of now, the repo rate is at 6.5%, and the RBI has kept it there for 11 successive meetings. A few were expecting that the RBI would cut the rate to boost growth and help businesses grow, but the central bank has not taken that step. The RBI is primarily worried about the inflation and the growth in the economy, both of which are not in good shape currently.
2. What is the RBI’s Revised GDP Growth Forecast for FY25?
Now, let’s talk about India’s economic growth. The RBI recently revised its real GDP growth forecast for the fiscal year 2024-2025 (FY25). Initially, the RBI had projected that India would grow by 7.2%. However, in light of current economic conditions, that forecast has now been lowered to 6.6%.
So, why the change? Well, there are a couple of reasons for that. Firstly, these inflationary pressures have been driving consumer and business investment demand. Once the prices are rising, consumers reduce spending, hence reducing demand.
In fact, there are also worldwide economic issues related to disruptions in supply chains and even geopolitics impacting India’s growth prospects. As such, while the overall economy of India is still expected to grow, all these factors have made the revised forecast reflective of a more cautious outlook.
3. What Factors Are Driving the High Inflation in India?
Now, the major issue that India is dealing with currently is inflation. Indian inflation is due to a multitude of reasons. Indian inflation rose to 6.21% in October 2024, which is the highest in the last 14 months. Inflation rates are higher than the RBI set rate of 4%. What are some of the key factors responsible for rising inflation? Let’s try to figure that out.
- High Food Prices: Another reason for inflation is a hike in food prices. India’s huge population consumes products like vegetables, pulses, edible oils, and other food items. During the last couple of months, these items have experienced a surge in prices. Bad weather, high input costs, and low supply are responsible for such an increase in food prices, which comprise most of the inflation basket.
- Global Supply Chain Disruptions: The pandemic continues to take its toll in the world economy, and everything takes much longer to go back to normal. Transportation delays, shortages of key materials, and trade barriers between nations all work to make things costlier. That impacts India’s prices as well, obviously.
- Fuel Price Increase: Another significant inflation driver is the fuel price increase. So, every time the global oil price rises, India takes the blow. The increased fuel prices then translate to increased transportation costs that are eventually passed on to all commodities and services, making groceries and holidays a little costlier once again.
- Demand and Supply Imbalance: As the Indian economy is coming out of the pandemic, demand for goods and services has been soaring. But the supply side has been falling short in matching that up. That is creating this gap in demand and supply and therefore raising prices. The more in demand, the higher prices.
4. What does the RBI expect about food prices and their impact on inflation in the coming quarters?
Since food prices remain one of the main drivers of inflation, it is more about the way they are going to shape up in the coming quarters that matters. The RBI has recently shared its expectations on food price behavior, and though it has been cautionary in its approach, there does seem to be some semblance of hope for relief at least.
The RBI expects the food inflation during the October-December 2024 quarter to be relatively high because of supply chain disruptions and seasonal reasons. There is some hope, however, for the rabi season, which is India’s winter crop season. Good harvests would ease the pressure on food prices, the RBI feels. A good rabi season would bring the prices of important crops like wheat, pulses, and vegetables down further, helping bring overall inflation down.
The RBI has since revised its inflation forecasts for the quarters ahead. So, in Q3 FY25, it forecasts inflation at 5.7%—a level that remains above the central bank’s target but at least exhibits some easing.
The RBI expects inflation at 4% for Q2 FY26, closer to the target for the central bank.
So, how do these decisions and projections impact you? For starters, the RBI will keep the repo rate at 6.5%, thus making borrowing costly in the near term. Want to buy a car, house, or open up a new business? Well, don’t expect interest rates to fall anytime soon. This is something to keep in mind, especially if you’re planning on making a big purchase or investment.
On the bright side, the RBI’s focus on managing inflation is a good sign for the long-term health of the economy. As food inflation pressures ease, the cost of living could start to stabilize, which would help consumers. For businesses, the revised GDP growth forecast of 6.6% indicates that India’s economy will continue to grow, albeit at a slower pace than initially expected.
For savers or investors, a consistent rate repo would mean fixed deposit returns and other forms of savings instruments are attractive when compared to other developed market nations’ interest rates. That being said, if one aims to invest directly into the stock market, then careful consideration of both inflation projections and growth projections is advisable.
Summary Conclusion: Proceed with Caution
Bottom Line: For the 11th straight time, the RBI has maintained repo rate at 6.5%. This very policy displays caution of the RBI in a decision. Even though this one is a cause for concern, inflation, the RBI does not want it to be out of hand. With GDP growth forecast at 6.6% in FY25, India’s economy still shows some growth though facing headwinds.
There are, of course, concerns driven primarily by increasing food prices and the disruptions caused by the global supply chain. Hope exists that the good rabi season, combined with better stability in the global economy, might begin easing inflationary trends over the next quarter or two.
Thus, so long as you are a saver, a borrower, or an investor, it becomes very pertinent to be vigilant to these changes and update plans. The economy is crossing some trickier waters, but proper strategy can always help us together tide over this storm.
