RBI hits the pause button for the 3rd time- What does this mean?

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Apurva Dhamankar

8/27/20232 min read

The Reserve Bank of India's Monetary Policy Committee (MPC) met to discuss interest rates and monetary policy issues. The committee predicted interest rates to remain constant but anticipated an increase in inflation due to food costs, especially vegetable prices. The repo rate was kept at 6.5%, serving as an economic signal for interest rate changes. The anticipated inflation rate was raised from 5.2% to 6.2% for the current quarter, which runs from July to September 2023. Seasonal price inflation for fruits and vegetables has a greater influence on this quarter than at other times.

The cash reserve ratio (CRR) is 4.5%, with an additional 10% CRR due to the removal of the ₹ 2,000 note. Inflation is expected to rise due to rising production costs. Although May’s inflation decreased to 4.3%, stronger inflation is expected in August. Food costs and El Nino’s impact on rainfall and agriculture production may increase inflation rates. Global food and crude oil prices have also risen, indicating potential inflation increases.

The repo rate is a reference point for interest rates in the banking industry, affecting borrowers with floating-rate house loans. When the RBI lowers the repo rate, commercial banks can borrow funds at lower costs, reducing lending rates, especially house loan interest rates. Conversely, when the RBI raises the repo rate, banks' borrowing rates rise, increasing borrowers' EMIs and increasing the entire cost of their house loan. Some borrowers choose fixed-interest mortgages, where changes in the repo rate do not directly affect EMIs during the fixed-rate period.

The Reserve Bank of India has maintained a 6.5% repo rate for a third consecutive time, to focus on maintaining price stability, ensuring adequate flow of credit to sustain the growth momentum, and securing financial stability also expected to support the home property market's holiday sales. This decision may impact low-income and affordable housing, but further increases may affect demand. Customers can benefit from home loans and floating-rate loans. A fall in key rates is welcomed, as low-interest rates are crucial for real estate demand and industry liquidity. The repo rate impacts interest rates on financial products, especially house loans, making informed property purchases essential.

Thank you.

Regards,

Tanvi Dahanukar,

Kautilya, IBS Mumbai.

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