STRATEGIC SUPERVISION

In its June review, the MPC has decided to maintain a status quo on monetary policy; however, it remains watchful regarding inflation

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The six-member Monetary Policy Committee (MPC), which serves as the interest rate-setting body of the Reserve Bank of India (RBI), has kept its policy rates unchanged for the second consecutive time in June. The decision to maintain the status quo on policy rates was anticipated, considering the recent decline in inflation. This provides the RBI with an opportunity to adopt a more cautious approach, allowing it to assess the outcomes of previous rate hikes.

In the current interest rate hike cycle, the MPC has raised the repurchase rate (repo rate) from 4% in May ‘22 to 6.5%, indicating a hike of 250 basis points. In April and now in June, the MPC has chosen to maintain policy rates at their current levels without making any changes.

To provide some background on the rate hike cycle, following the Covid-19 pandemic, inflation measured by the Consumer Price Index (CPI) remained above the 6% threshold for several quarters. This necessitated the MPC to implement a series of consecutive rate hikes. The MPC’s mandate is to maintain inflation at a level of 4% within a band of 2% on either side.

With the status quo in June, the repurchase rate (repo) now stands at 6.5%, and the policy stance has been kept at ‘withdrawal of accommodation.’ The repo rate is the interest rate at which banks borrow from the RBI in times of tight liquidity in exchange for government securities as collateral. The repo rate influences all the other interest rates in the system such as banks’ lending and borrowing rates. It also influences yields on government and corporate bonds. The policy stance gives some indication of the future direction of the upcoming reviews.

After the June policy review, two things have become clear: One, we may have reached the end of the rate-hike cycle and two, the RBI is now working towards keeping inflation tamed at 4%.