The Reserve Bank of India (RBI) will most likely maintain its policy repo rate at 6.5% for the eleventh consecutive time during the concluding Monetary Policy Committee (MPC) meeting of 2024. This anticipated decision arises in the context of a difficult economic environment characterized by increasing inflation, decelerating GDP growth, and global uncertainties. The RBI’s steadfast policy approach demonstrates its efforts to strike a balance between controlling inflation and fostering economic growth.
October 2024 saw consumer price index (CPI) inflation surge to 6.2%, exceeding the RBI’s upper tolerance limit of 6%. The primary drivers were food price inflation and global geopolitical disruptions, which have strained supply chains. India’s real GDP growth rate for Q2 FY25 fell to 5.4%, a significant drop from 7% in the previous quarter and well below the RBI’s annual projection of 7.2%.
Why the RBI May Hold the Repo Rate?
The RBI’s inflation targeting framework mandates maintaining inflation at 4%, with a tolerance band of 2%. With inflation exceeding this range and growth slowing, the central bank finds itself in a tough position. However, given the current high inflation, the MPC is expected to prioritise price stability over immediate growth revival.
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Borrowing Strategy in a Stable Repo Rate Environment
For borrowers, a stable repo rate provides clarity in the short term. Here’s how different types of borrowers can navigate the situation:
1. Home Loan Borrowers
Floating Rate Borrowers: Adhil Shetty, CEO of Bankbazaar.com, says, “Those with floating-rate loans tied to external benchmarks (like the repo rate) will not see changes in their equated monthly instalments (EMIs). However, they should monitor rate movements, as any signs of a future rate cut could mean lower interest payments. Consider partial prepayments to reduce the principal burden if feasible.”
Fixed Rate Borrowers: Those on fixed-rate loans remain unaffected in the short term. With a potential rate cut in early 2025, switching to floating rates might be advantageous if aligned with their financial goals.
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