As expected, the Reserve Bank of India\’s (RBI) Monetary Policy Committee (MPC) has decided to keep interest rates unchanged during its October review meeting and has maintained its posture of gradually withdrawing stimulus measures. The current interest rate cycle had already reached its highest point with the repo rate hike in February. The RBI\’s preference for elevated interest rates for an extended period is influenced by a combination of domestic and international factors.
While external factors do play a role, it is the domestic considerations that carry greater weight. Unforeseen inflationary pressures, largely beyond the control of policymakers, began to surface at the beginning of the second quarter of the fiscal year. This was primarily due to surging prices of essential commodities like tomatoes and other food items. While the spike in vegetable prices has subsided, a new challenge has emerged in the form of volatile and rising crude oil prices. The RBI Governor also noted that the transmission of previous rate hikes, totaling 250 basis points since May 2022, to lending and deposit rates at banks remains incomplete. These factors have led the MPC to maintain its stance of gradually withdrawing stimulus measures.
