Why Repo Rates Have Remained Unchanged In India

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Why Repo Rates Have Remained Unchanged In India

| Updated: February 9, 2024 21:47

For the sixth time in a row, the Reserve Bank of India’s rate-setting panel, the Monetary Policy Committee (MPC), kept the repo rate unchanged at 6.5%.

The Repo Rate is the rate of interest the Reserve Bank of India (RBI) charges while lending to commercial banks.

Given the uncertainty of food inflation, volatility in oil prices, and geopolitical disruptions, it seems a sagacious decision, an editorial published by The Print observed. 

Although the acreage of wheat and oilseeds planted in Rabi crops has increased over the previous year by 0.7 and 1.1%, respectively, there is still a great deal of uncertainty regarding the trajectory of food inflation because of unfavourable weather.

Cereal and pulse prices are still high despite the seasonal moderation in vegetable prices, the editorial notes.

Further, it adds that even though inflation that is not related to food or oil is still low, recent geopolitical upheavals also present an upside risk to inflation. Due to improved US economic growth and indications of Chinese stimulus boosting demand, the price of crude oil has been gradually rising globally in recent weeks. The US military’s assaults in the Middle East have also caused an increase in oil prices. These circumstances call for a constant watch on inflation.

The 5.4% inflation estimate for the current year is not changing. Assuming a typical monsoon, inflation is predicted to drop to 4.5% for the upcoming year.

The overnight rate, also known as the weighted average call rate, has been trending toward the upper end of the Liquidity Adjustment Facility (LAF) corridor, even though the policy rate remains at 6.5%. This occurred as a result of the banking system’s liquidity being in deficit since September. The system-level deficit was caused by reduced government spending and slower deposit growth than credit growth. Even though the RBI held variable rate repo auctions (VRR) to help reduce the deficit, there was still a liquidity shortfall at the system level.

Following the budget, the liquidity deficit decreased in the first week of February as a result of an increase in government spending. The weighted average call rate decreased as a result. To remove liquidity, the RBI held Variable Rate Reverse Repo (VRRR) auctions. This suggests that the RBI may not be pleased with the call rate gradually falling below the repo rate, but it is comfortable with call rates staying above the repo rate in order to maintain a system-level deficit.

High levels of public debt, especially in developed nations, may harm prospects for global growth. In advanced economies, in particular, the gross debt-to-GDP ratio is probably going to be higher than 100% by 2024. This could create questions about the sustainability of debt in an environment of high interest rates, present a new source of financial strain, and make the job of monetary policy more difficult.

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