The Reserve Bank of India (RBI) on Thursday maintained status quo on the benchmark interest rate for the third successive time but sang a hawkish tone when it sharply raised the inflation forecast and warned that borrowing costs would be tightened again if the rise in food prices spreads.

At the end of a three-day meeting, the monetary policy committee (MPC) kept the repo rate at 6.50 per cent with all members voting unanimously for an unchanged repo rate.

While home and car loan borrowers will not have to worry since the RBI has
kept the interest rates unchanged, economists feel that a cut will now be delayed given the inflation projections of the central bank.

The retention of the key interest rate was accompanied by an hawkish language amid headline inflation rising to 4.8 per cent in June on account of higher food prices and wary forecasts projecting the headline number will again cross the upper limit of 6 per cent in July on account of the rise in the prices of tomatoes, pulses and cereals.

The fear of inflation getting generalised was highlighted by RBI governor Shaktikanta Das in his customary post policy interaction with the media.

“The recent spike in CPI inflation is expected to be short-lived, going by past trends. In such situations, we need to remain watchful and not resort to any knee-jerk reactions,” he said.

“If these spikes, these idiosyncrasies in CPI inflation, particularly food inflation show signs of getting generalised, we may have to act. And we have to go beyond maintaining Arjun’s eye to deploy actual policy instruments’’.

His comment on activating the policy instrument would suggest that the central bank will not hesitate in raising rates again should inflation remain firm.

The RBI has in the past maintained that it wants CPI (consumer price inflation) inflation to align to the mandated level of 4 per cent.

Explaining why the
committee went for no change in the repo rate, Das said
the cumulative rate hike of 250 basis points undertaken
between May last year to February 2023 is working its way into the economy even as domestic economic activity is holding up well.

Stocks indices wilt

Benchmark equity indices declined on Thursday after the RBI monetary policy, dragged down by banking counters, after the unexpected announcement of reducing cash in the financial system.
Investors also remained on the sidelines ahead of the US inflation data announcement.

The Sensex fell 307.63 points, or 0.47 per cent, to settle at 65688.18. During the day, it tanked 486.67 points to 65509.14.