What to expect from RBI this year and where are the interest rates headed?

RBI Monetary Policy – June’23

As expected by us, RBI in its monetary policy meeting held from 6- 8th of June decided to keep the Repo rate unchanged. This was primarily driven by the easing of retail inflation in April. Further, the inflation (as measured by the consumer price index) fell to a 2 year low of 4.25% in May 2023.

RBI continues to project a steady real GDP growth rate of 6.5% for FY23- 24. As the inflation rate has fallen below the RBI tolerance rate of 6% continuously for the last 3 months, and there’s the need for a more realistic interest rate scenario, we expect that by the end of this financial year (FY23-24) the Repo rate will come down by around 0.5-1.0%.

We expect RBI to now continue its soft stance and gradually reduce the Repo rate over the next few months. Though it is of utmost importance that the RBI continues to keep an eye on the inflation and takes action whenever needed. RBI maintains that its target is to bring down the inflation rate below 4% and we don’t expect any rate cuts till the inflation rate falls below

Note: The RBI’s Monetary Policy Committee meets periodically to review economic and financial developments and make decisions regarding monetary policy. These decisions are communicated through policy statements and press releases, which provide insights into the RBI’s assessment of the economy, inflation outlook, and the rationale behind its policy stance.

The primary objective of the RBI’s monetary policy is to maintain price stability while keeping in mind the objective of growth. The RBI aims to control inflation within a target range, which is currently set at 4% with a tolerance band of +/- 2%. The central bank uses various tools to manage liquidity, credit availability, and interest rates to achieve its objectives.

The key policy rates set by the RBI are the repo rate, reverse repo rate, and the marginal standing facility (MSF) rate. The repo rate is the rate at which the RBI lends money to commercial banks, while the reverse repo rate is the rate at which it borrows from them. The MSF rate is the rate at which scheduled banks can borrow overnight funds from the RBI against government securities. These rates
play a crucial role in influencing borrowing costs for banks, which in turn affects lending rates for businesses and individuals.

The RBI uses these policy rates, along with other tools such as open market operations (buying and selling of government securities), cash reserve ratio (CRR), and statutory liquidity ratio (SLR), to manage liquidity in the banking system and control inflation.

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