RBI keeps repo rate unchanged amid inflation fears

In a closely watched decision, the Monetary Policy Committee (MPC) announced that it would maintain the repo rate at its current level,  citing the continuing threat from inflation in Asia's third-largest economy.The decision came in the wake of a recent spike in inflation triggered by high prices of food items. One basis point is one- hundredth of a percentage point. The MPC kept the repo rate, or the rate at which the central bank lends short-term funds to banks, at 6.5 percent. Since May 2022, the RBI has hiked the rates by 250 bps as part of it fight against inflation. The country's retail inflation hit 4.81 percent in June from 4.31 percent in May, pushed up by a rise in vegetable prices and fading away of the favourable base effect.

On Thursday, announcing the decision, Reserve Bank of India (RBI) Governor Shaktikanta Das repeated his caution on the inflation front.While the domestic economy continues to grow at a reasonable pace and constitues 15% of the global growth the MPC has decided to remain watchful of the economic situation,Governor Shaktikanta Das said. Taking note of the recent surge in vegetable price, particularly tomatoes and the firming up of prices globally,the RBI increased its consumer price index-based (CPI)inflation projection for 2023-24 (April-March) to 5.4% from 5.1%, according to recent updates.

The CPI for July is estimated to move back above the upper end of the 2-6% tolerance band to 6.2% Das said. Economists had, however, thought that despite falling inflation, the MPC might continue with a cautious approach and would hold the rates steady in the August round of the monetary policy review, which is exactly what the MPC did on Thursday.