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The Reserve Bank of India (RBI) kept its key lending rate unchanged at its fourth consecutive policy meeting on Friday, as was widely expected by investors. Instead of the interest rate decision, market attention was primarily focused on the central bank's strategies for managing liquidity due to a resurgence in inflation.
The country's monetary policy committee (MPC) unanimously decided to maintain the repo rate at 6.50%, in line with the expectations of most economists surveyed by Reuters. This decision followed a series of rate hikes totaling 250 basis points (bps) that began in May 2022, aimed at curbing rising prices.
The RBI's policy stance also remained unchanged, emphasizing the "withdrawal of accommodation" to ensure that inflation gradually aligns with the committee's target while still supporting economic growth, as stated by RBI Governor Shaktikanta Das. This stance was supported by five out of the six committee members.
Although annual retail inflation in August eased to 6.83% from a 15-month high of 7.44% in July, it remained well above the central bank's comfort range of 2% to 6%. The main driver of this persistent inflation has been sharp increases in food prices, primarily due to erratic weather conditions affecting the production of essential items such as vegetables, milk, and cereals.
With high inflation levels, the central bank faces challenges in terms of liquidity management. There is limited room to continue raising interest rates without potentially harming economic growth. As a result, market participants are closely monitoring the RBI's commentary and any additional measures it may take to address these concerns.
