RBI leaves repo rate unchanged at 6.5% as record-high food prices pinch

August 10, 2023: The Reserve Bank of India today decided to leave the repo rate unchanged at 6.5% amid local pressure arising out of record high vegetable prices and global economic concerns. The move to maintain a status quo on the key policy rate for the third time by the banking regular is largely on the expected lines.

All six-members of RBI’s rate setting panel voted in favour of the move.

The Monetary Policy Committee (MPC) has also decided to continue with the withdrawal of accommodation with a 5-1 vote to ensure that inflation progressively aligns with the target while supporting growth.

While announcing the decision of the panel at the end of a three-day meeting, RBI governor Shaktikanta Das said the Central bank would closely monitor the situations at home and outside to spearhead the country in the right direction amid threats of a disruptive monsoon, among other things, derailing India’s growth plans. The rate hike pause has been done with “preparedness to act if situation so warrants”, Das said.

“Headline inflation, after reaching a low of 4.3% in May 2023
rose in June and is expected to surge during July-August led by vegetable prices. While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory,” the RBI governor said in his virtual press statement.

The RBI’s rate-setting panel started its three-day bi-monthly meeting on August 8 amid rising concerns rising food prices ─ tomatoes, chili and ginger are being sold at Rs 300 a kg, 100 a kg and Rs 400 a kg, respectively.

Retail inflation increased to 4.81% in June after touching a 25-month low of 4.25% in May on an annual basis. Between February 2023 and May 2022, the RBI has increased the repo rate by 250 basis points (bps) to tackle inflation.

“Inflation is expected to head towards the 6%-mark because of vegetables and pulses prices going up. We expect this to be temporary in nature, and, therefore, there is no case of increasing rates,” Madan Sabnavis, chief economist, Bank of Baroda, told the media earlier.

“I reiterate our commitment to align CPI (consumer price index-based) inflation to the 4% target on a durable basis. We do look through idiosyncratic shocks, but if such idiosyncrasies show signs of persistence, we have to act,” said Das.

Impact on home loans, housing sector

The developer community has welcomed the RBI move, saying it would benefit the sector in general and homebuyers in particular. A long pause in the policy rate will be supportive to the housing market, says Shishir Baijal, chairman & managing director, Knight Frank India.

“The RBI has taken a bold step in keeping the repo rate unchanged at 6.5%, backed by the country’s macro-economic resilience, a robust banking system and strong financial markets. This is the right step to assess the impact of the previous six consecutive rate hikes working their way through the current inflationary cycle and overall economy,” Samantak Das, chief economist and head-research and REIS, India, JLL.

“Given that the affordability synergy was under challenge with home loan EMIs rising by 15-17% from April 2022 and home prices also increasing during the same period by 4-12%, the current status quo in policy rate will provide some respite. This should positively support the current home-buying sentiment,” he adds.

“This pause in the repo rate will help in improving market sentiments which is essential, given the upcoming festive season. This will drive housing demand, while controlling inflationary trends,” says Pritam Chivukula, vice-president, Credai-MCHI and co-founder & director, Tridhaatu Realty.

Although the decision might not have an immediate impact on the prospective homeowners, says Siddha Group director Samyak Jain, it does offer some stability to the real estate sector.

According to Sandeep Runwal, President, Naredco Maharashtra, a rate cut would have positively impacted the optimism of potential homebuyers while the RBI move to maintain a status quo is a favorable step.