RBI MPC Preview: Governor Das To Announce Decision Tomorrow. Here Is What To Expect

Even amidst forecasts of inflation breaching the RBI's upper tolerance band of 6 per cent in July, analysts expect the RBI to continue with the pause on the repo rate with a hawkish stance

After hiking the repo rate six consecutive times since May 2022 by 250 basis points to 6.5 per cent, the RBI has maintained a status quo in the last two MPC meetings.  ( Image Source :Getty )

The Reserve Bank of India's (RBI's) monetary policy committee (MPC) headed by Governor Shaktikanta Das is holding its three-day meeting to decide the key interest rates. The six-membered committee will announce its decision on Thursday, August 10. After hiking the repo rate six consecutive times since May 2022 by 250 basis points to 6.5 per cent, the central bank has maintained a status quo in the last two MPC meetings. 

Even amidst forecasts of inflation breaching RBI's upper tolerance band of 6 per cent in July, analysts and economists expect RBI to continue with the pause on the repo rate with a hawkish stance. 

Monetary Policy Committee And Repo Rate

The Reserve Bank of India (RBI), established under the RBI Act of 1934, plays a pivotal role in shaping India's economic landscape through its monetary policy framework with a primary goal of maintaining price stability while fostering growth. The Monetary Policy Committee (MPC), composed of six members including the RBI Governor and Deputy Governor, is tasked with determining the policy repo rate, a key interest rate that influences borrowing costs in the economy. This rate is adjusted to achieve the inflation target.

As of now, the government has tasked the central bank to target a 4 per cent inflation was set, with an upper limit of 6 per cent and a lower limit of 2 per cent.

The committee convenes at least four times a year to deliberate on economic data, growth prospects, and inflation forecasts. Each member contributes their viewpoint and votes on policy decisions. In the event of a tie, the Governor holds a casting vote.

The RBI employs various tools to implement its monetary policy. The repo rate, the rate at which banks borrow from the RBI, stands as a significant instrument. Adjustments to this rate influence liquidity, borrowing costs, and economic activity.

Additionally, the central bank uses the reverse repo rate, standing deposit facility (SDF) rate, and marginal standing facility (MSF) rate to manage liquidity and lending. These rates collectively shape the liquidity adjustment facility (LAF) corridor, a range within which short-term interest rates operate.

As of now, RBI's monetary panel consists of Shashanka Bhide, Ashima Goyal, and Jayanth R Varma as external members and Governor Shaktikant Das, Rajiv Ranjan (Executive Director), and Michael Debabrata Patra (Deputy Governor).

Inflation Concerns  

Retail inflation, measured by the Consumer Price Index (CPI), rose to 4.81 per cent in June, a three-month peak, primarily due to higher food prices. However, this figure remained within the RBI's target. The inflation data for July is scheduled for release on August 14. The repo rate is employed to manage liquidity. To curb inflation, the repo rate is raised, reducing cash availability for spending. Higher repo rates lead to increased deposit returns, prompting savings, while also raising lending rates, deterring borrowing and spending. Conversely, a lower repo rate boosts available funds, encouraging spending and demand, and countering deflation or disinflation.

Due to weather-related disturbances, prices of food commodities have risen in recent months. Especially, the price of Tomatoes has been sky rocketing even as the government tried to provide subsidies. 

"While the inflationary pressures are upwards owing to primarily vegetables and some other food items, given that the inflation print is going to be below 6 per cent, the MPC can afford to continue with a pause. The demand continues to be weak at the lower value end of the spectrum and hence the Indian inflation continues to be a supply-side-driven one," said Ranen Banerjee, Partner, Economic Advisory Services, PwC India, a per Business Standard. 

Dhruv Agarwala, Group CEO, Housing.com, Proptiger.com, and Makaan.com, as per the report, said, "Given the ongoing global economic uncertainties and persistent geopolitical risks, it is likely that the RBI will continue to exercise a cautious approach and keep interest rates unchanged, leading to a rate pause in its upcoming policy decision."

Repo Rate And EMI Concerns 

When the RBI raises the repo rate, borrowing money becomes more costly for banks. They often transfer this expense to borrowers by increasing loan interest rates, potentially resulting in higher EMIs (equated monthly installments). The impact of a repo rate hike on EMIs varies based on factors like the size of the increase, the bank's base interest rate, and the loan term. 

An Anarock report highlighted that affordable homebuyers have seen their EMIs rise by about 20 per cent in the last two years. For instance, floating interest rates on home loans up to Rs 30 lakh have surged from 6.7 per cent in mid-2021 to around 9.15 per cent presently.

Prashant Thakur, regional director and head of research at Anarock Group, said, "Home loan borrowers who were paying an EMI of Rs 22,700 in July 2021 are now paying Rs 27,300 today, an increase of Rs 4,600 per month. This 20 per cent increase in the EMI has resulted in a jump of Rs 11 lakh in the overall interest component - from Rs 24.5 lakh interest payable in 2021 to Rs 35.5 lakh today."