Why Repo rate kept constant at 6.5% by MPC?

The repo rate (or repurchase rate) is the rate at which the central bank of a country (in India, the Reserve Bank of India or RBI) lends money to commercial banks in the short term, typically to help them manage liquidity. The repo rate is a crucial tool used by the central bank to regulate the country's money supply, inflation, and economic stability.

RBI monetary policy: Broadly in line with market expectations, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Wednesday, October 9, announced a status quo on repo rates but tweaked the policy stance to "neutral" from "withdrawal of accommodation", while reiterating the risk of inflation.

The central bank retained FY25 GDP growth and inflation estimates. However, it highlighted the risk of sticky inflation, as it expects the September CPI to increase because of unfavourable base effects and a rise in fuel prices.

1. Inflation Remains a Key Concern

Despite not revising its overall inflation projection for FY25, the RBI highlighted concerns around persistent inflationary pressures, driven by fluctuating food and fuel prices. The central bank maintained its CPI inflation estimate for FY25 at 4.5%, but adjusted projections for individual quarters. It lowered the Q2FY25 CPI estimate to 4.1% from 4.4% while raising the Q3FY25 estimate to 4.8% from 4.7%. Additionally, inflation estimates for Q4FY25 and Q1FY26 were trimmed slightly, with Q4FY25 down to 4.2% (from 4.3%) and Q1FY26 to 4.3% (from 4.4%). RBI Governor Shaktikanta Das noted that while inflation eased significantly in July and August due to a favorable base effect, core inflation rose during the same period. He also warned that CPI inflation could rise in September due to base effects and higher fuel prices.

2. Growth Prospects Remain Strong

The RBI continues to express optimism about India's economic growth, projecting a real GDP growth rate of 7.2% for FY25. However, the central bank adjusted growth expectations for the quarters. It lowered the Q2FY25 GDP growth forecast to 7% (from 7.2%) but raised forecasts for the later quarters: Q3FY25 to 7.4% (from 7.3%), Q4FY25 to 7.4% (from 7.2%), and Q1FY26 to 7.3% (from 7.2%). This signals confidence in the Indian growth story, with stronger momentum expected in the latter part of the fiscal year.

3. UPI Limits Increased

The RBI announced an increase in UPI transaction limits to encourage wider adoption. The UPI 123 Pay per-transaction limit was raised from ₹5,000 to ₹10,000, while the UPI Lite wallet limit was increased from ₹2,000 to ₹5,000. Additionally, the per-transaction limit for UPI Lite was doubled from ₹500 to ₹1,000.

4. Risks in Unsecured Loans

Governor Das cautioned about potential risks in certain unsecured loan segments, such as consumer loans, microfinance, and credit card debt. He emphasized the importance of monitoring stress buildup in these areas, particularly in terms of loan size and quality. Das urged banks and NBFCs to maintain strong underwriting standards and ensure post-sanction monitoring. He also highlighted the need for vigilance on issues like cybersecurity risks, inactive deposit accounts, and fraudulent activities like mule accounts.

5. Global Economic Considerations

The RBI continues to factor in global economic trends, particularly the monetary policies of major economies like the United States and the European Union. If global interest rates rise or fall, the RBI may keep the repo rate steady to prevent capital outflows or currency volatility. Maintaining a stable repo rate can also help stabilize the Indian rupee, especially in times of global financial uncertainty.