RBI maintains repo rate at 6.5%, shifts to a neutral stance

The Reserve Bank of India (RBI) has kept the repo rate steady at 6.5% for the tenth time, while shifting its stance to “neutral,” aiming to balance inflation control with economic growth. Food inflation, contributing around 70% to overall retail inflation, remains a key concern, as rising prices threaten price stability. The RBI remains vigilant on inflation trends, particularly in the food sector, while maintaining its focus on long-term economic stability.

The Reserve Bank of India’s monetary policy has seen a significant shift in recent years. During the COVID-19 pandemic, the RBI adopted an accommodative stance, aiming to increase the money supply to boost the economy in response to the downturn. The primary goal was to encourage spending and support economic recovery. However, as inflation surged in 2022-2023—driven by global supply chain issues, rising energy costs, and a rebound in demand—the RBI began signaling a change in its approach.

By early 2023, the central bank started emphasizing the need to prioritize inflation control while keeping economic recovery on track. In February 2023, the RBI raised the repo rate to 6.5%, a level it has maintained since then. In October 2024, the RBI has now kept the repo rate unchanged for the tenth consecutive time but shifted its stance from “withdrawal of accommodation” to “neutral”, which indicates RBI’s approach balancing act of controlling inflationary pressures without hindering economic growth. The central bank remains committed to maintaining a stable inflation rate that aligns with its long-term goals, all while promoting sustainable economic development.

This shift provides relief to borrowers, as lending rates linked to the repo rates will remain stable, keeping their EMIs from rising. However, borrowers with loans tied to the marginal cost of funds-based lending rate (MCLR) might still face higher interest rates. The full impact of the 250 basis points hike in the repo rate between May 2022 and February 2023 has yet to be fully transmitted into MCLR-based loans.

Food inflation has played a significant role in driving overall retail inflation, contributing to around 70% of the total. With food prices remaining stubbornly high, this has raised concerns that inflationary pressures could derail efforts to stabilize prices. While the RBI has maintained the repo rate, it remains watchful of inflation trends, particularly in the food sector, which continues to affect the overall inflation rate.

Overall, the RBI remains optimistic about India’s economic prospects, projecting a real GDP growth rate of 7.2% for FY25. While the growth outlook for Q2FY25 has been slightly revised down to 7% from 7.2%, expectations for the subsequent quarters have been adjusted upward. The RBI has raised its GDP growth forecasts for Q3FY25, Q4FY25, and Q1FY26, reflecting a positive outlook for the remainder of FY25 and into FY26. This revision underscores the resilience of India’s economy in the face of global challenges.