The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) recently concluded its second meeting of FY25, maintaining the repo rate unchanged at 6.5%. This decision comes amidst projections of India's GDP growth at 7.2%. The MPC, comprising six members including RBI Governor Shaktikanta Das, plays a crucial role in determining the nation's benchmark interest rate, impacting borrowing costs and loan rates.
Historically, the repo rate was last changed in February 2023, rising from 6.25% to 6.5%. This marked a 250 basis point increase between May 2022 and February 2023, influencing borrowing costs for banks and, consequently, interest rates on loans for businesses and individuals.
In terms of inflation and economic growth, CPI inflation for FY25 continues its disinflationary trend, holding steady at 4.5%. However, food inflation remains elevated due to price pressures in key categories. Core inflation, excluding food and fuel, eased to 3.2% in April, the lowest in the current CPI series. The Statutory Liquidity Ratio (SLR) and bank rates also remain at 6.75%, with real GDP growth projected at 7.2%, up from 7% previously.
The MPC's decision to maintain the repo rate at 6.5% may disappoint those expecting lower loan EMIs. Despite concerns over food inflation, recent election results have complicated potential rate cuts. The RBI's focus on balancing inflation control with economic growth has led to the repo rate remaining unchanged for the eighth consecutive meeting.
In terms of fiscal measures and financial flows, the RBI has transferred Rs 2.11 lakh crore to the Government of India as a dividend, following a central board decision to increase risk provisioning. Foreign Portfolio Investment (FPI) flows have also surged in FY24, contributing positively to India's economic growth.
On the technology front, the RBI approved the introduction of auto-replenishment for the UPI Lite wallet, aiming to ensure seamless transactions. The RBI's focus on trust, safety, security, and inclusivity in the financial system underscores its commitment to enhancing financial access and minimizing fraud.
The MPC's role in managing key rates, including the repo rate and CRR, is aimed at keeping inflation near the 4% target while fostering economic growth. Lowering the repo rate makes lending cheaper for banks, thereby reducing loan rates and EMIs. The recent surplus dividend from the RBI was expected to significantly reduce the fiscal deficit; however, actual outcomes suggest a different scenario.
In conclusion, the decisions of the RBI's MPC have far-reaching implications for India's economic landscape. By balancing inflation control with growth objectives, the MPC's actions influence borrowing costs, economic growth, and financial stability. Understanding these decisions is crucial for anticipating economic trends and preparing for financial implications.
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