RBI Maintains Repo Rate at 6.5%: Analysing the Market's Positive Reaction

RBI's Latest Monetary Policy Decision

On June 7, the Reserve Bank of India's Monetary Policy Committee (MPC) kept the repo rate steady at 6.5% for the eighth consecutive time, continuing with the policy stance of 'withdrawal of accommodation.'

Market Reaction to Monetary Policy Announcement

Following the announcement, the markets gained momentum and trended upward throughout the day. The Nifty surged 2.05%, or 468.75 points, closing at 23,290.15, while the Sensex rose by 2.16%, or 1,618.85 points, finishing at 76,693.36. Despite this anticipated decision, why did the markets respond so positively? Here are two key reasons:

A Shift in Voting Signals Potential Policy Changes

Firstly, the voting pattern within the MPC shifted to a narrower 4 to 2 margin, compared to the 5 to 1 split in April. This change indicates a growing divergence in opinions among the committee members. Notably, Ashima Goyal opted for a 25 basis point rate cut, aligning with Jayanth Varma, who had previously been the sole advocate for a rate cut. This alignment hints at a possible shift towards a more accommodative policy stance in upcoming sessions.

Upward Revision of Growth Forecasts Boosts Market Sentiment

Secondly, the MPC revised its growth forecast for the current fiscal year upward from 7% to 7.2%. This adjustment comes even after an upward revision of the previous year's GDP growth from 7.6% to 8.2%, highlighting robust economic momentum. Such a bullish growth outlook further fuelled market optimism, suggesting that the Indian economy is positioned to outperform on a global scale.

Inflation and Policy Stance: A Balancing Act

Despite the high growth trajectory, the RBI continues to navigate through inflationary pressures, which could intensify, especially with expected increases in rural spending following recent elections. The latest HSBC India Composite PMI report also supports this cautious stance, noting an acceleration in inflation rates across both manufacturing and service sectors in May.

Governor Das emphasized the importance of maintaining price stability to ensure inflation aligns with the target on a durable basis, balancing support for growth while managing inflation expectations. The forecast for retail inflation by the end of Q4 2024-25 remains pegged at 4.5%.

Conclusion: A Cautious yet Optimistic Outlook

The RBI's decision to maintain the repo rate, coupled with a cautious yet optimistic economic outlook, reflects a strategic approach to fostering stable growth while keeping inflation in check. The subtle shifts in MPC voting patterns and economic forecasts suggest that while the current policy is steady, future adjustments could be on the horizon, depending on economic developments and inflation dynamics.

Frequently Asked Questions (FAQs)

What is the repo rate and how does it work?

The repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. Changes in the repo rate influence the interest rates on loans, affecting how much consumers pay for borrowing money.

How does the repo rate affect consumers?

When the repo rate is adjusted, it impacts consumers by influencing the cost of loans for homes, cars, and other expenses. A higher repo rate makes loans more expensive, while a lower rate can make borrowing cheaper.

Which sectors of the economy are most affected by changes in the repo rate?

Various sectors are affected by changes in the repo rate, notably real estate, which is sensitive to loan rates, and manufacturing, where investment costs can be influenced by borrowing costs.

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