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The Reserve Bank of India (RBI) announced its latest monetary policy decision on Thursday, February 8th, 2024, opting to maintain the key repo rate at 6.5%. It marks the sixth consecutive meeting where the rate has remained unchanged, indicating a cautious approach amidst moderating inflation and ongoing economic considerations.

Why is the repo rate unchanged?

  • Declining Inflation: Governor Shaktikanta Das highlighted the decline in headline inflation from 6.7% in 2022 to an average of 5.5% between April and December 2023. This trend aligns with the RBI's inflation target of 4% (+/- 2%).
  • Balancing Act: While acknowledging progress, Governor Das emphasised the need to balance inflation risks with supporting economic growth. Geopolitical tensions and volatile commodity prices remain areas of concern.
  • Future Projections: The RBI projects CPI inflation for FY24 at 5.4%, further declining to 4.5% in FY25. These projections are based on assumptions of a normal monsoon season.

Implications for borrowers and lenders

  • Existing Borrowers: Existing borrowers with floating-rate loans can expect some temporary relief with the stable repo rate. However, future rate adjustments could still impact their EMIs.
  • New Borrowers: Interest rates on new loans are unlikely to see significant immediate changes. However, long-term borrowing costs might be influenced by future monetary policy decisions.
  • Lenders: Banks and other financial institutions might offer competitive rates to attract borrowers, potentially impacting their profit margins in the short term.

Looking ahead

  • The MPC's future decisions will hinge on evolving economic data and inflation trends.
  • External factors like global markets and geopolitical tensions will be closely monitored.
  • Domestic developments like monsoon performance and government policies will also be crucial considerations.

Conclusion 

While acknowledging progress on the inflation front, Das underscores the need for continued vigilance considering external uncertainties and potential risks. Borrowers can enjoy a temporary reprieve with stable rates, but future adjustments remain a possibility. For lenders, maintaining competitiveness might translate to lower profit margins in the short term. Ultimately, the MPC's future course will depend on evolving data and a careful assessment of risks and opportunities. As always, staying informed about economic developments and seeking professional guidance remain crucial for navigating the financial landscape effectively.

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