'RBI has taken a good call, I think': FM Sitharaman on RBI rate hike pause

RBI keeps repo rate unchanged: Finance Minister Nirmala Sitharaman lauded the Reserve Bank of India’s decision to keep the benchmark rate unchanged. Earlier in the day, the central bank said that it has decided to keep the repo rate unchanged at 6.50 per cent in its latest Monetary Policy Committee meeting.

RBI Governor Shaktikanta Das on Thursday said that the withdrawal of accommodation and that the repo rate hike has been paused only for this meeting. He added that the MPC decided unanimously to keep the policy repo rate unchanged in this meeting with readiness to act should the situation warrant.

Reacting to the decision, Sitharaman said: “RBI has taken a good call, I think.”

She added that inflation has been kept at six per cent or below, signaling that the move is positive.

The central bank projected inflation to drop to 5.2 per cent for FY24. It projected inflation for Q1FY24, Q2FY24, Q3FY24, and Q4FY24 at 5.1 per cent, 5.4 per cent, 5.4 per cent, and 5.2 per cent, respectively.

Since May last year, the central bank has increased the rate by 250 bps over inflation concerns. The central bank hiked the benchmark rate at six MPC meetings till February 2023. On Thursday, April 6, 2023, the RBI's MPC kept it unchanged at 6.5 per cent, which in total is a hike of 250 basis points in this cycle. However, the RBI governor in his policy speech mentioned that the rate pause was done after the RBI hiked the rate by 290 basis points and not 250 bps.

Here's the logical rationale of the statement. Though the central bank has increased the key policy repo rate cumulatively on six meetings by 250 bps, it was preceded by the introduction of the Standing Deposit Facility (SDF) at a rate 40 bps higher than the fixed rate reverse repo. Therefore, the effective rate hike since early last year has been 290 bps.

What is Standing Deposit Facility?

A Standing Deposit Facility is an overnight deposit facility floated by the RBI, which allows banks to park excess liquidity (money) and earn interest. The reverse repo system allows the RBI to deposit collateral in the form of government assets in order to borrow money from commercial banks, with SDF, banks can store surplus liquidity with the RBI at their discretion.

It is considered more efficient than the Reverse Repo arrangement where Government securities had to be sold-and-repurchased to absorb liquidity and pay interest.

But under this, the RBI can, if needed, absorb liquidity for longer tenures with proper pricing. The SDF scheme is open to all participants in the liquidity adjustment facility (LAF).

Also read: RBI MPC announcement: Central bank keeps repo rate constant, other key takeaways

Also read: 'This is only a pause, not a pivot': RBI Gov Shaktikanta Das on keeping rates unchanged

Also read: RBI hits 'pause button' on rate hikes! Here's how it will impact Indian markets