Repo Rate to Remain the Same: A Comprehensive Analysis of MPC’s Strategy

In its first meeting of the financial year 2024-25 scheduled to be held between April 3 and April 5, The Monetary Policy Committee (MPC) of the Reserve Bank of India has decided to make no changes in its repo rate. The panel is also expected to maintain the policy stance of ‘withdrawal of accommodation.’ The repo rate, which is at 6.5% has remained constant over the last seven MPC meetings after a 25-basis point (bp) hike in February 2023. 

The non-changes policy of the repo rate may continue for the first half of the fiscal year, and the first-rate cut may happen in the quarter of July to September. This decision was taken after the US Federal Bank decided to keep a pause on its interest rate between 5.25% and 5.2%, while the Bank of Japan raised its interest rate for the first time since 2007, eventually ending an eight-year-old negative interest rate regime. BoJ’s interest rate was increased from (-)0.1% to a range of zero to 0.1%.

The RBI has received orders from the government to maintain inflation at 4%, simultaneously allowing a comfort band of 2%. The inflation rate stayed flat at 5.09% in February against the initial 5.1% in January. As per analysts, RBI would most probably cut the repo rate constant until the 4% target for inflation is achieved regularly.  

A Goldman Sachs report said,” We expect the RBI MPC to keep the policy repo rate unchanged at the April 5 meeting at 6.5%, retain the monetary policy stance of ‘withdrawal of accommodation’, sound optimistic on growth, and continue to reiterate the commitment to the 4% headline inflation target.”

Nirmala Sitharaman, Union Finance Minister expressed that she expects growth of 8% or over 8% in the GDP of the fourth and final quarter (January to March 2024). This raise would further accelerate the GDP for the financial year 2024 to an average of 8% or more. The RBI projects a real GDP growth of 7% for the present financial year, i.e.2025. 

What is the Repo Rate?

The repo rate accounts for the rate at which central banks of a country (Reserve Bank for India) lend financial funds to commercial banks in case they face any shortage of monetary assets. Monetary organizations such as the RBI, the US Federal Bank, or the Bank of Japan use repo rates to control inflation scenarios. 

How does the Repo Rate work?

When commercial banks face a shortage of funds, they seek help from their central bank who then lend them money at certain rates. Repo rates are increased to regulate the liquidity of commercial banks. This implies that the higher the repo rate, the more interest amount the commercial banks are liable to pay back for the money lent to them. Thus one can infer from the above statement that repo rates eventually affect public borrowings such as home loans, EMIs, etc. Higher repo rates discourage banks from borrowing money from their nation’s respective central banks, ultimately bringing a smooth pace to the money supply into the economy and curbing down inflation.