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MPC meeting: How RBI repo rate hike has impacted inflation behaviour

Submitted by admin on June 8th, 2024

The Reserve Bank of India or RBI has recently organized its second MPC (Monetary Policy Committee) meeting for the FY 2024-25. The meeting was hosted from June 5-7. As per market analysts’ prediction, the RBI will retain the repo rate at 6.5 per cent, as concerns over food inflation are still not over.

The repo rate is defined as the rate at which the Central Bank lends to commercial banks.

As per a Bloomberg pool, economists foresee that the RBI maintaining the repo rate for the eighth time at a stretch.

Despite expectations for the RBI’s MPC meeting to start reducing interest rates soon, the exact timing is not certain. The MPC’s decision from the recently held meeting was supposed to be announced on June 7.

A pertinent question is how the RBI repo rate will influence inflation behaviour.

Headline retail inflation remained unchanged at 4.83 per cent in April, after going down from 4.85 per cent in March.

But the food inflation surged to 8.7 per cent in April 2024, up from 8.52 in March. Fruits had a considerable month-on-month (MoM) increase of 6.2 per cent, the highest among food categories. Vegetables experienced a hike by 1.3 per cent MoM, which implies reduced availability during the peak summer months.

However, core CPI inflation, which excludees food and fuel components, remained virtually static at 3.4 per cent in April 2024 and hence, gives some respite.

Year-on-year inflation in the miscellaneous category remained static at 3.5 per cent in April 2024 compared to the last month.

In the last meeting, the RBI MPC kept the repo rate same at 6.5 per cent for the seventh consecutive time. The monetary policy stance is still one of “withdrawal of accommodation” as five of six members favour the decision.

The rate increase cycle experienced a pause in April last year after its six consecutive hikes amounting to 250 basis points since May 2022. The last time the RBI increased the repo rate to 6.5 per cent was in February 2023.

In Financial Year 2023, and 2 months into Financial Year 2025, food inflation continues to be a case of concern for the RBI. It is still ranging from 8-10 per cent.

If it comes to growth, India’s GDP (Growth Domestic Product) experienced an annual increase by 7.8 per cent during the first quarter of 2024, up from 6.2 per cent surge during the same period a year ago, exceeding analysts’ expectations.

For the entire FY 2023-24, India’s GDP growth rate touched 8.2 percent whereas the growth rate was 7 percent in the last financial year, according to an official statement.

The repo rate refers to the rate at which the RBI lends money to commercial banks against the sale of securities. The rate is meant to maintain liquidity during fund shortages or owing to statutory measures. The RBI uses this primary tool to control inflation.

From a technical viewpoint, repo means ‘Repurchase Agreement’ or ‘Repurchasing Option’. As per the agreement, banks provide the right kind of securities including Treasury Bills to the Reserve Bank of India in lieu of overnight loans, with an agreement to buy them back at a predetermined price. The arrangement allows banks to obtain cash whereas the RBI holds the securities.