No change in EMI, but inflation may play spoiler

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In a relief to borrowers, the Reserve Bank of India left its key interest rates unchanged for a third straight meeting but hinted at tighter policy if food prices keep rising. The monetary policy committee held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision.

The MPC retained the stance on “withdrawal of accommodation” but Governor Shaktikanta Das sounded hawkish when he said that headline inflation needs to settle below 4 per cent and any surge, if continued for a longer period, may call for fresh action. With excess liquidity in the banking system, RBI raised the incremental cash reserve ratio to 10 per cent on the incremental net demand and time liabilities over the last 3 months. This will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI.

The higher ICRR is expected to suck out about Rs 1 lakh crore from the banking system.  But this will not impact the credit needs, Das said.

“The job on inflation is still not done,” Das said. “Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties.” The RBI raised its inflation forecast for the current financial year ending March 2024 to 5.4 per cent from 5.1 per cent earlier, citing pressures from food prices. In the July-September quarter, it saw inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.

This is the third straight meeting where RBI kept interest rates unchanged. Prior to that, it had raised interest rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.