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Why RBI has opted for status quo, how continued pause in rate hikes affects your loan EMIs

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Why RBI has opted for status quo, how continued pause in rate hikes affects your loan EMIs

Context- Lending and deposit rates are likely to remain unchanged following the decision of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to keep the main policy instrument — the Repo rate — unchanged at 6.50 per cent on Thursday. Equated monthly installments (EMIs) of home, vehicle and other borrowers will remain steady for the time being.

The six-member MPC, led by RBI Governor Shaktikanta Das, retained the policy stance as “withdrawal of accommodation” and cut the inflation projection marginally from 5.2 per cent to 5.1 per cent for FY2024.

(Credits- GeeksforGeeks)

Why is the RBI in pause mode on raising interest rates?

  • The pause in the Repo rate — the rate at which RBI lends money to banks to meet their short-term funding needs — on Thursday (June 8) is for the second time since the RBI started hiking Repo rate in May 2022 to check inflation. In the April policy, the MPC members, in a surprise move, had unanimously decided to pause the rate hike cycle.
  • Also, India’s gross domestic product (GDP) expanded at 6.1 per cent January-March 2023 quarter, in turn pushing up the growth estimate for the full year (2022-23) to 7.2 per cent. With ease in inflation and strong GDP growth, the RBI is likely to maintain the status quo in the June policy, experts said.

What will happen to lending and deposit rates?

  • As the RBI has kept the policy rate unchanged in the June policy, external benchmark lending rates (EBLR) linked to the repo rate will also not rise. It will provide some relief to borrowers as their equated monthly installments (EMIs) will not increase.
  • Banks will also not increase fixed deposit rates. The decision to hold deposit rates at the current levels will be driven by surplus liquidity in the banking system due to improvement in low-cost current account and savings account (CASA) balance following the deposit of Rs 2000 banknotes.
  • The pause in the Repo rate hike should not be seen as a flattening of the rate hike cycle. The RBI in its statement said that it remained focused on the withdrawal of accommodative stance.

Why has RBI retained the stance of withdrawal of accommodation?

  • The RBI has focused on its stance of ‘withdrawal of accommodation’ until all risks to inflation dissipate. An accommodative stance means the central bank is prepared to expand the money supply to boost economic growth. Withdrawal of accommodation means reducing the money supply in the system which will rein in inflation further.
  • The liquidity condition in the banking system has improved because of the deposit of Rs 2000 banknotes which were withdrawn from circulation last month and higher government spending. On June 6, the net liquidity surplus in the banking system stood at Rs 2.11 lakh crore, RBI data showed.

What is the outlook on GDP and inflation?

  • On Thursday, the policy panel said the retail inflation is expected to be just above 5 per cent at 5.1 cent, down from the 5.2 per cent estimated earlier, and kept the real GDP growth projection unchanged at 6.5 per cent in FY24.
  • However, upside risks do persist. Delayed onset of the monsoon, voluntary production cuts announced by OPEC members to support crude oil prices, and passing of the debt ceiling deal in the US might exert upward pressure on commodity and domestic food prices

Syllabus- Prelims; Current Affairs

Source- Indian Express

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