RBI hits pause button, keeps repo rate unchanged at 6.50%

In a surprise move, the Reserve Bank of India (RBI) on Thursday decided to keep repo rate unchaged.This was largely against expectations of a 25 basis points hike by economists and analysts.

The repo rate is the rate at which Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds.

The central bank has already increased repo rate by a total of 250 basis points since May in a bid to contain inflation, though it has continued to remain above the RBI's comfort zone of 6 per cent most of the time.

The two key factors which the committee is expected to deliberate intensely while firming up the next monetary policy are elevated retail inflation and the recent action taken by central banks of developed nations especially the US Federal Reserve, the European Central Bank and Bank of England.

Having remained below six per cent for two months (November and December 2022), the retail inflation breached the RBI's comfort zone in January, warranting action by the central bank.

The Consumer Price Index (CPI)-based inflation was 6.52 per cent in January and 6.44 per cent in February.

Experts are of the view that the central bank will raise the key policy rate (repo) by 25 basis points on Thursday, and it would probably be the last in the current monetary policy tightening cycle that began in May.

The RBI has so far raised repo rate six times including the off-cycle surprise increase of 40 basis points in May 2022.

The RBI has been tasked to ensure that retail inflation remains at 4 per cent with a margin of +/-2 per cent. However, it failed to keep inflation rate below six per cent for three consecutive quarters beginning January 2022.