The Reserve Bank of India (RBI), in its widely-watched monetary policy announcement, left the policy repo rate unchanged at 6.5 per cent. For the tenth consecutive time, the RBI has decided to retain the key policy interest rate, at which the lender banks borrow from the central bank.

"After evaluating the macroeconomic conditions and future outlook, the Monetary Policy Committee (MPC) has decided, with 5 out of 6 members in agreement, to maintain the policy rate at 6.5 per cent," RBI Governor Shaktikanta Das said.

The central bank's move, driven primarily by macroeconomic and geopolitical dynamics, would mean that retail consumers will neither have to pay more for their loans nor less. It brings relief to borrowers amid the festive season. 

The apex bank, however, has shifted its policy stance to 'neutral', implying that interest rates may be revised downward in the next few quarters depending on the economic conditions. 

The RBI also maintained the GDP growth estimate for the current financial year at 7.2 per cent. As per its estimate, the growth rate for the second quarter will touch 7 per cent, while in the third and fourth quarters, the economy will grow at 7.4 per cent.

The MPC noted that the domestic growth outlook remains resilient supported by domestic drivers – private consumption and investment. This provides headroom for monetary policy to focus on the goal of attaining a durable alignment of inflation with the target.

India’s GDP growth rate during the April-June quarter stood at 6.7 per cent, against 8.2 per cent in the corresponding period in 2023-24, which resulted in speculations earlier that the central bank may reduce rates in its October MPC.

“System liquidity remains in surplus during August and September and also in early October, with a pickup in government spending and decline in currency-in-circulation,” Das said.

As per RBI’s projections, inflation in the current financial year is estimated to rise to 4.8 per cent in the third quarter and 4.2 per cent in the fourth. With the rise in food prices and an unfavourable statistical base, retail inflation in September could increase, Das added.

"As long as inflation remains higher than the mean CPI inflation target of 4 per cent, the MPC may remain reluctant to reduce the policy rate,"  DK Srivastava, Chief Policy Advisor, EY India said, adding that the rate reduction cycle may be postponed even beyond December 2024 unless the speed and extent of global policy rate reductions make it urgent.

Former Finance Secretary Subhash Chandra Garg told The Secretariat in an interview that credit growth has been rising depsite RBI's decision to keep interest rate unchanged for 10 times. He also that food inflation is based on other dynamics and not on monetary policy. “Temporary setbacks and artificial disruptions are the main factors driving food prices. We must learn to live with food inflation,” he added. 

Last month, the US Federal Reserve announced an interest rate cut of 50 basis points after the two-day Federal Open Market Committee (FOMC) meeting. The decision to reduce interest rates came after four years. In fact, the US Fed’s decision is expected to weaken the US dollar while pushing the Indian rupee up. “Therefore RBI has decided to be cautious, as concerns over inflation remain,” an official source told The Secretariat.

Three external members of the Monetary Policy Committee — Ram Singh, Director, Delhi School of Economics, Saugata Bhattacharya, economist and former Senior Vice President at Axis Bank, and Nagesh Kumar, Director and CEO, Institute for Studies in Industrial Development — have been appointed only last week.

Interestingly, Nagesh Kumar voted for a reduction in policy repo rate by 25 basis points. In the last MPC meet, the split 4.2 voting among the six member MPC had grabbed the headline.

The three members appointed last week replaced Ashima Goyal, Jayanth R Varma and Shashanka Bhide, after their tenure ended on October 4, 2024. Goyal and Varma had voted for a reduction in repo rate in the last MPC meeting in August.