India's central bank keeps interest rate unchanged at 6.5% due to high food inflation

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has kept the Repo rate steady at 6.5% for the ninth consecutive meeting, citing persistent food inflation as a significant threat to retail inflation. 

The decision was announced on Thursday, August 8, and the monetary policy stance remains at ‘withdrawal of accommodation.’

As a result of the MPC’s decision, banks are expected to maintain their current interest rates, ensuring that equated monthly instalments (EMIs) for loans will remain unchanged.

This stability provides relief to borrowers who have been concerned about potential increases in their loan payments.

The RBI has also maintained its gross domestic product (GDP) growth projection for FY2025 at 7.2% and the retail inflation forecast at 4.5%, despite ongoing challenges with food inflation. 

The International Monetary Fund (IMF) upgraded India's GDP growth forecast in FY25 by 20 basis points to 7% in July.

Persistent food inflation

Over the past several months, the RBI has expressed increasing concern about elevated food inflation, which poses a risk to the overall disinflation path. 

Headline inflation, measured by year-on-year changes in the all-India consumer price index (CPI), rose to 5.1% in June from 4.8% in May. Food inflation, in particular, increased to 8.4% in June from 7.9% in May.

The RBI said in a statement,

RBI governor Shaktikanta Das emphasized the need for price stability to achieve high growth, noting that the MPC must remain vigilant to prevent spillover effects from persistent food inflation.

The central bank said a degree of relief in food inflation is expected from the pick-up in the southwest monsoon and healthy progress in sowing. Buffer stocks of cereals continue to be above the norms.

It pegged CPI inflation for 2024-25 at 4.5% provided there was a normal monsoon.

Fed's rate action to likely guide RBI's future stance: analysts

Recent rapid movements in global markets, driven by tensions in the Middle East, a surge in the Japanese yen, and concerns about a US recession, have heightened expectations of rate cuts by the US Federal Reserve.

Madhavi Arora, lead economist, at Emkay Global Financial Services, said,

Arora however added that India's growth projections by the RBI (7.2% for FY25) are overly optimistic, with weaker demand dynamics likely to keep core inflation under pressure.

According to an HDFC Bank statement: