RBI Hits Pause Button For Third Time In Row As It Keeps Repo Rate Unchanged

India's central bank, the Reserve Bank of India (RBI), today announced its MPC meeting's decision to keep the repo rate unchanged at 6.5%. This is the third time in a row that the RBI has hit the pause button on repo rate changes.

RBI governor Shaktikanta Das announced the decisions of the three-day Monetary Policy Committee (MPC) meeting on Thursday, saying that "As we celebrate India¡¯s 77th Independence Day in a few days, I am happy to note that the Indian economy is exuding enhanced strength and stability despite the massive shocks to the global economy in recent years."

The Sensex and Nifty both dropped nearly 0.6% after the RBI's Monetary Policy announcement early this morning. As per various media reports, Bank FD rates and loan EMIs are likely to go down as rate cuts are expected in the near future.

The Triple Pause After Six Back-To-Back Rate Hikes

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The repo rate was hiked six back-to-back times from May 2022 to February 2023, after which the RBI kept the rate unchanged in the April and June meetings, and now for the third consecutive time in this August meeting.

For the uninitiated, the repo rate is the rate at which the RBI lends money to commercial banks whenever the latter falls short of funds or needs liquidity. The banks borrow from the RBI against qualifying securities put up as collateral, such as government bonds and Treasury bills.

Simply put, just like we, as customers, borrow loans from banks at the applicable interest rates on loans, banks borrow from the RBI whenever required at the repo rate.

The RBI had cumulatively hiked interest rates by 250 bps points in its last six announcements since May 2022. RBI hiked the repo rate by 40 bps in May, after which it hiked it four more times, by 50 bps in June, August, and September each, and then a slightly softer hike of 35 basis points in December 2022 and 25 bps in February 2023.

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Also Read: How RBI Governor Is Appointed

RBI Revises Inflation Target Upwards Amid Vegetable Price Shocks

The RBI will remain watchful of inflation and remain resolute to its commitment to align inflation to the targeted level, said the governor. The RBI governor said that they have revised retail inflation for FY24 to 5.4% vs. an earlier estimate of 5.1% due to vegetable price shocks.

Other Big Announcements By RBI

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The RBI governor said that to increase the speed of small-value transactions on UPI, an on-device wallet called "UPI-Lite" was launched in September 2022 to optimise processing resources for banks, thereby reducing transaction failures. The product has gained traction and currently processes more than ten million transactions a month. To promote the use of UPI-Lite, it is proposed to facilitate offline transactions using Near Field Communication (NFC) technology. This feature will not only enable retail digital payments in situations where internet or telecom connectivity is weak or not available, but it will also ensure speed with minimal transaction declines. Instructions to the NPCI will be issued shortly.

Also, the RBI enhanced transaction limits for small-value digital payments. "A limit of ?200 per transaction and an overall limit of ?2000 per payment instrument has been prescribed by the Reserve Bank for small value digital payments in offline mode including for National Common Mobility Card (NCMC) and UPI Lite. By removing the need for two-factor authentication for small value transactions, these channels enable faster, reliable, and contactless mode of payments for everyday small value payments, transit payments etc. Since then, there have been demands for enhancing these limits."

To encourage wider adoption of this mode of payment and bring more use cases into this mode, it is now proposed to increase the per-transaction limit to ?500. The overall limit is, however, retained at ?2000 to contain the risks associated with the relaxation of two-factor authentication. Instructions in this regard will be issued shortly, the RBI governor said.

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