RBI’s MPC Meeting: Will repo rate be cut amid low GDP growth and high inflation?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), which began its three-day meeting Wednesday, will review the economic conditions and decide on the repo rate, the rate at which RBI lends money to commercial banks. Led by RBI Governor Shaktikanta Das, the six-member panel will announce its decision on December 6. All eyes are on the meeting which comes at a time when India is fraught with challenges such as low GDP growth and high inflation.

What is Monetary Policy Committee?

The Monetary Policy Committee (MPC) is a six-member committee constituted by the central government — three members are from RBI and the remaining three are appointed by the central government. It is responsible for fixing the benchmark interest rate in India. The meetings of MPC are held at least four times a year and the monetary policy is published after every meeting.

Who are the members of MPC?

The committee has six members. RBI Governor Shaktikanta Das is the chairperson of MPC, RBI’s executive director Rajiv Ranjan, and Deputy Governor Michael Debabrata Patra are also on the panel. In October, the central government appointed economist Saugata Bhattacharya, Dr Nagesh Kumar, director and chief executive at Institute for Studies in Industrial Development, and Ram Singh, director of Delhi School of Economics to the RBI monetary policy committee after previous member’s contract expired on October 4.  As per the Finance Ministry, the new members of MPC shall hold office for a period of four years, effective immediately.

What is Repo Rate?

The repo rate is the interest rate at which RBI lends money to commercial banks. An increased repo rate means that banks borrowing money from the central bank during this period will have to pay more interest. This inhibits banks from borrowing money, reducing the amount of money in the market and helping to negate inflation.

What is Reverse Repo Rate?

The reverse repo rate, is the rate at which RBI borrows money from banks in the short term. It’s the opposite of the repo rate, which is the interest rate at which a central bank lends money to these institutions. RBI does this to suck out excess liquidity in the system.

Current Economic Scenario

After the lowest GDP growth in the last seven quarters, all the eyes are now fixed on RBI’s MPC policy. India’s Gross Domestic Product (GDP) slowed to 5.4 per cent in the second quarter (July-September) of 2024-25, the third consecutive quarter of slower growth, reflecting weakened manufacturing, consumption, and private investments. As per the government data, this is the lowest growth rate in seven quarters. The last time the economy fell below this was in the third quarter of fiscal 2023. As far as inflation is concerned, driven by a sharp increase in prices of food products, particularly the vegetables, India’s retail inflation touched a 14-month high in October. The inflation based on the consumer price index increased to 6.21 per cent in October, up from 5.49 per cent in September, according to the data released by the Ministry of Statistics and Programme Implementation recently.

Will RBI change the repo rate?

In the last MPC meeting in August, RBI kept the benchmark interest rate and stance unchanged at 6.5 per cent for the ninth straight policy meeting. “Considering the GDP data, which missed its projection for the second consecutive quarter. The pressure is built, however, the inflation data also saw a sudden increase. The increase in inflation may very well be a seasonal pattern, but Governor Das has consistently emphasised the threat that inflation could pose for the economy if left untamed. Nevertheless, we understand significance of the GDP data which came well below expectation. Therefore, the probability of a rate cut in December is as equal as a flip of a coin,” said Harsimran Sahni, executive vice president and head, Treasury, Anand Rathi Global Finance.