The Reserve Bank of India on Friday (October 6) decided to keep the policy rate unchanged for the fourth time in a row as it maintains a tight vigil on inflation.
The rate increase cycle was paused in April after six consecutive rate hikes aggregating to 250 basis points since May 2022.
Also Read: RBI MPC Meet 2023 LIVE Updates
Announcing the bi-monthly monetary policy, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 6.5 per cent.
The MPC meeting took place against the backdrop of Consumer Price-based Inflation (CPI) touching 6.83 per cent in August.
The government has mandated the RBI to keep CPI inflation at 4 per cent with a margin of 2 per cent on either side.
CPI inflation eased to 6.83% in August 2023, from 7.44% in July 2023. This was first time in five months that inflation has fallen below 7%.
The CPI inflation rate is a measure of the average change over time in the prices paid by consumers for a basket of goods and services. It is the most widely used gauge of inflation in India.
The high inflation rate has been driven by rising food and fuel prices. Food inflation was 9.94% in August 2023, while fuel and light inflation was 3.7%.
Key decisions around inflation and impact on housing market
Das said the MPC will remain watchful of the inflation and remains resolute in its commitment to align inflation to the targeted level.
According to him, the growth projection has been retained at 6.5 per cent for the current financial year with risks evenly balanced
Das said;
- RBI forecasts retail inflation at 5.4 per cent for 2023-24.
- Indications are that food inflation may not see sustained easing in Q3. (Oct-Dec)
- Retail inflation to moderate to 5.2 per cent in next year from the current level of 6.8 per cent
- Near term inflation to soften on lowering of vegetable price and reduction in cooking gas cylinder rate.
- Inflation is likely to ease in September. The government has mandated the RBI to keep CPI inflation at 4 percent with a margin of 2 per cent on either side. The September print of inflation is expected next week.
RBI has retained GDP growth forecast for current fiscal at 6.5 per cent with risks evenly balanced.
Impact on housing market
Anuj Puri, chairman, Anarock Group, said that the unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimised home purchases.
He said if we consider the present trends, the overall consumer market looks bullish across sectors, particularly the automobile and housing markets, which in many ways reflect the health of the economy.
“We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market,” Puri added.
As per Anarock Research, housing sales across the top 7 cities created a new peak in Q3 2023 (despite the usually slow monsoon quarter) and stood at 1,20,280 units as against over 88,230 units sold in Q3 2022, thus recording 36% yearly growth.
“Thanks to the stable repo rate and the resultantly stable home loan interest rates, we can expect the momentum to continue,” Puri added.
The repo rate is the rate at which the RBI lends money to commercial banks. It is a crucial tool used by the central bank to control inflation and stabilise the economy.
Interest rates, including the repo rate, can change based on the economic conditions and decisions made by the central bank.
How repo rate impacts inflation?
When the central bank (like RBI in India) increases the repo rate, it becomes more expensive for commercial banks to borrow money from the central bank. As a result, commercial banks may raise the interest rates they charge consumers and businesses for loans.
Higher interest rates make borrowing more expensive, leading to a reduction in borrowing by businesses and consumers. This, in turn, can lead to lower spending and investment in the economy.
By influencing interest rates, the repo rate affects aggregate demand. Higher interest rates tend to reduce consumer spending and business investment, which can lead to a decrease in overall demand for goods and services in the economy.
The repo rate influences inflation expectations. If the central bank raises the repo rate to combat inflation, it sends a signal to the market that it is committed to controlling inflation. This can influence expectations, and when people expect lower inflation, they may act in ways that contribute to stabilising prices.
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