The Reserve Bank of India (RBI) recently announced its bi-monthly monetary policy and has decided to keep the repo rate unchanged at 6.5%. This move came as a surprise to many, as economists were expecting a rate hike of 25 basis points.
In simple terms, the repo rate is the interest rate at which the RBI lends money to commercial banks. This rate has a direct impact on the borrowing cost of individuals and businesses, as banks typically pass on the changes in repo rate to their customers. A hike in repo rate means higher borrowing costs, while a cut means lower borrowing costs.
The decision to keep the repo rate unchanged is seen as a "hawkish pause" by the RBI, indicating its concern over rising inflation. Inflation has been a major concern for the Indian economy, with the consumer price index (CPI) inflation rising to 5.52% in March 2023, which is above the RBI's target range of 2-6%.
The RBI has also maintained its accommodative stance, which means that it is still willing to provide liquidity support to the economy, but not at the cost of higher inflation. This is in line with the central bank's objective of maintaining price stability while supporting growth.
The decision to keep the repo rate unchanged is expected to have a mixed impact on the Indian economy. On the one hand, it will provide some relief to businesses and individuals who were expecting a rate hike. On the other hand, it may lead to a slowdown in economic growth, as higher borrowing costs could have stimulated demand and investment.
The Indian stock market reacted positively to the RBI's decision, with the benchmark indices turning positive immediately after the announcement. The Nifty 50 and the BSE Sensex gained 0.7% and 0.8% respectively, indicating that investors were relieved by the central bank's decision.
However, the Indian rupee weakened against the US dollar after the announcement, with the USD/INR exchange rate hovering around 83.00. This indicates that foreign investors may be cautious about investing in the Indian economy, as they see the RBI's decision as a sign of concern over rising inflation.
Overall, the RBI's decision to keep the repo rate unchanged reflects its cautious approach toward the Indian economy. The central bank is aware of the risks posed by rising inflation and is trying to strike a balance between supporting growth and maintaining price stability. The coming months will be critical for the Indian economy, as it navigates the challenges posed by inflation, a weak rupee, and global economic uncertainties.
