RBI MPC 2023: Why RBI has kept repo rate unchanged while growth forecast revised upwards

RBI Monetary Policy Review – December 2023

1. Unchanged Repo Rate Amid Growth Revision

In a 5:1 majority decision, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has decided to keep the Repo rate unchanged at 6.5%. This decision is aligned with the policy stance of ‘withdrawal of accommodation.’

2. Economic Growth Projection Upgraded

Despite the recent surge in vegetable prices, the RBI has revised its growth estimate upwards for FY 2024 from 6.5% to 7%, citing a better-than-expected second-quarter gross domestic product (GDP) print of 7.6%.

3. Inflation Risks and Policy Stance

The inflation estimate for the fiscal remains steady at 5.4%. The decision to maintain the current Repo rate is driven by concerns over potential inflationary pressures, particularly from the recent spike in vegetable prices.

4. Impact on Lending and Deposit Rates

Interest rates on home, vehicle, personal, and other loans will remain unchanged for now. While some segments of retail loans may see increased costs due to the RBI’s recent hike in risk weights, external benchmark lending rates linked to the repo rate will not rise, providing relief to borrowers.

5. RBI’s Inflation and Growth Balancing Act

The RBI, led by Governor Shaktikanta Das, aims to manage and balance retail inflation and economic growth. With food inflation expected to rise, the central bank sees no justification for lowering the repo rate. Core inflation around 4% also prevents a rate hike.

6. Inflation Outlook and Policy Watch

Consumer price-based inflation (CPI) eased to 4.87% in October, but the RBI remains vigilant due to potential risks in food inflation. Governor Das highlights the “masked” near-term inflation outlook, emphasizing the need to monitor November and December for any second-round effects.

7. GDP Projections and Risks

The second-quarter GDP growth exceeded expectations at 7.6%, leading to an upgrade in the FY2024 growth forecast to 7%. However, potential upside risks to headline inflation exist, driven by uncertainties in agricultural output and weather conditions, particularly affecting food prices.

8. Policy Continuity

This marks the fifth consecutive policy review where the MPC has maintained the repo rate at 6.5%. The last change was a 25 basis points hike in February 2023, contributing to a cumulative 250 basis points increase between May 2022 and February 2023.

Questions Related to Exams

Q. Why did the RBI keep the repo rate unchanged in December 2023?

A. The RBI maintained the repo rate at 6.5% to balance retail inflation and economic growth, considering the potential increase in food prices.

Q. What led to the upward revision of the GDP growth forecast to 7% for FY 2024?

A. The second-quarter GDP growth surpassed expectations at 7.6%, prompting the RBI to upgrade the annual growth forecast.

Q. How will interest rates on loans and deposits be affected by the December 2023 monetary policy?

A. Interest rates on loans and deposits will remain unchanged, providing relief to borrowers. Some retail loan segments may see increased costs due to a recent hike in risk weights.

Q. What factors influenced the RBI’s decision to maintain the current policy stance?

A. Concerns over potential inflationary pressures, especially from a recent spike in vegetable prices, influenced the RBI’s decision to keep the ‘withdrawal of accommodation’ policy stance.

Q. What is the inflation outlook, and why is the RBI closely monitoring November and December?

A. Consumer price-based inflation (CPI) eased to 4.87% in October, but the RBI is vigilant due to potential risks in food inflation. The near-term outlook is “masked,” and November and December need monitoring for second-round effects.

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