In its monetary policy meeting held on Wednesday, the Reserve Bank of India (RBI) decided to maintain the repo rate at 6.5 percent for the tenth consecutive time. However, the rate-setting panel shifted its stance from ‘withdrawal of accommodation’ to ‘neutral.’
Impact on Borrowers
This decision implies that all external benchmark lending rates linked to the repo rate will remain unchanged, providing relief to borrowers since their equated monthly instalments (EMIs) will not increase.
Nonetheless, lenders may raise interest rates on loans connected to the marginal cost of fund-based lending rate (MCLR), where the full transmission of a 250 basis points hike in the repo rate—implemented between May 2022 and February 2023—has not yet occurred.
Response to Previous Hikes
In reaction to the 250 basis points increase in the policy repo rate since May 2022, banks have adjusted their repo-linked external benchmark-based lending rates (EBLRs) accordingly. The one-year median MCLR of banks has risen by 170 basis points from May 2022 to August 2024.
Inflation Concerns
In August, while keeping the rate unchanged, the RBI’s rate-setting panel expressed concerns regarding persistent food inflation, which could potentially disrupt the disinflation trajectory. The headline inflation rate, as gauged by year-on-year changes in the all-India consumer price index (CPI), increased to 5.1 percent in June from 4.8 percent in May. This rise was primarily attributed to food inflation, which climbed to 8.4 percent in June, compared to 7.9 percent in the previous month. “The food component of retail inflation remains stubborn… food inflation contributed around 70 percent of the overall retail inflation,” stated RBI Governor Shaktikanta Das.
Changes in the Monetary Policy Committee
Last week, the government reconstituted the Monetary Policy Committee by appointing three external members: Ram Singh, Director of the Delhi School of Economics at the University of Delhi; Saugata Bhattacharya, Economist; and Nagesh Kumar, Director and Chief Executive of the Institute for Studies in Industrial Development.
