NEW DELHI: The Reserve Bank of India (RBI) on Friday kept the benchmark repo rate unchanged at 6.5% as expected, but the uncertainty around inflation weighed on its policy stance, which was aggressive towards both rates and liquidity.
Repo rate is the rate of interest RBI charges banks when the latter borrows money from the central bank to make up for the shortage of funds. Sounding caution on the inflation side, the RBI kept its inflation estimate for FY24 at 5.4%. “The overall inflation outlook is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices,” RBI governor Shaktikanta Das said.
The Monetary Policy Committee (MPC), which decides the policy rates, has flagged the risk of large and overlapping food price shocks on headline inflation, Das added. RBI has been keeping the policy rate at 6.5% for eight months now. “The longest transitory period in repo rate’s history when it was kept on pause prior to a cut was 12 months, in 2014.
A similar event can’t be ruled out this time if the impact of food prices from lower kharif acreage does not impact RBI’s forecast for overall inflation for the rest of FY24,” said Debopam Chaudhuri, chief economist, Piramal Group.
The central bank has also retained its earlier GDP growth projection of 6.5% for FY24. Das reiterated that excessive liquidity in the banking system poses risk to both price and financial stability. The central bank has said that it may go for an open market sale of bonds to keep the liquidity in check.