The RBI governor said if the situation warrants the RBI will not hesitate to change the current stance.
The borrowing costs that have been on the rise since 2022 are expected to moderate after the repo rate remained unchanged. Experts say that with the benchmark rate unchanged at 6.5 percent, the cost of borrowing will moderate, leading to increased borrowing.
The pause in the increasing interest rates will be a relief to the borrowers, although this is a temporary move, said an official from Yes Bank. “Customers have been complaining about the rising interest rates. This pause will give some relief,” he said. The interest rates for various loans will see a temporary moderation, as a result of the decision by the Monetary Policy Committee (MPC), the official said.
Sankhanath Bandyopadhyay, an economist with a credit rating agency also said that this decision will moderate the rising borrowing costs. He said that another hike will not be healthy for the economy. “Although it will take time to evaluate the impact, this will be a huge relief to the real estate sector and those that are dependent on bank credit,” he said.
“The Reserve Bank of India (RBI) has kept the benchmark repo rate unchanged at 6.5 percent. After evaluating the unprecedented geopolitical and financial turmoil globally, the RBI has decided to keep the rates intact,” said Shaktikanta Das, the RBI governor.
In the first MPC meeting of the new fiscal year, Das said that decisions are taken to assess the progress made so far, and added, “We will not hesitate to change in the future if the situation warrants.”
This decision to keep the rates unchanged was not in line with the market expectation. The central bank’s focus on the withdrawal of accommodation has led to a total hike in the policy rates by 250 basis points (bps) (2.5 percent) since May 2022.
Since the start of the rate hike cycle, the loans availed by businesses have fallen. A report shows that from FY-2022, the fall in the percentage increase in the credit for the micro and small industries was around seven percent, and for the medium industries, it was by around 33 percent.
The total interest burden over the loan tenure of 20 years will increase by Rs. 18.8 lakh, with the 250 bps rate hike for a loan of Rs. 50 lakh with an interest of seven percent, a report from Business Standard shows.
While the decision to keep the repo rate intact was unanimous, there was a split vote of five to one to retain the stance of withdrawal of accommodation.
The retail inflation in the country in February was 6.4 percent, above the RBI’s targeted upper band of six percent. The prices of cereals, milk, fruits, and housing continued to rise in February, and the inflation in rural areas was higher than urban inflation.
Experts say this will give breathing time for the RBI to evaluate the progress made. Bandyopadhyay, said that by keeping the rates unchanged, they had kept the doors open for unprecedented situations that might happen.
Bandyopadhyay agrees with Das’s view on external tensions, saying that external situations like oil production cut by OPEC, and bad weather forecasts are a problem that can result in a rise in inflation. But he said, “The RBI had no control over these external factors, and hence there is no merit in a rate hike.” He added that there should be government policy interventions to minimize these impacts.
The growth rate of real Gross Domestic Product was pegged at 6.5 percent for FY 2023 – FY 2024, and the RBI projects the inflation to soften to 5.2 percent for the same FY. Das stressed, “Our job is not finished, and the war against inflation has to continue.”
The stock market recovered from the day’s low, and finished positive after the decision from the MPC meeting. Nifty 50 ended 0.26 percent higher, and BSE Sensex rose 0.24 percent. The bank Nifty rose to 40,293 points before closing a gain of 0.10 percent for the day.
