The Reserve Bank of India (RBI) will most likely maintain its policy repo rate at 6.5% for the eleventh consecutive time during the concluding Monetary Policy Committee (MPC) meeting of 2024. This anticipated decision arises in the context of a difficult economic environment characterized by increasing inflation, decelerating GDP growth, and global uncertainties. The RBI’s steadfast policy approach demonstrates its efforts to strike a balance between controlling inflation and fostering economic growth.

October 2024 saw consumer price index (CPI) inflation surge to 6.2%, exceeding the RBI’s upper tolerance limit of 6%. The primary drivers were food price inflation and global geopolitical disruptions, which have strained supply chains. India’s real GDP growth rate for Q2 FY25 fell to 5.4%, a significant drop from 7% in the previous quarter and well below the RBI’s annual projection of 7.2%.

Why the RBI May Hold the Repo Rate?

The RBI’s inflation targeting framework mandates maintaining inflation at 4%, with a tolerance band of 2%. With inflation exceeding this range and growth slowing, the central bank finds itself in a tough position. However, given the current high inflation, the MPC is expected to prioritise price stability over immediate growth revival.

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Borrowing Strategy in a Stable Repo Rate Environment

For borrowers, a stable repo rate provides clarity in the short term. Here’s how different types of borrowers can navigate the situation:

1. Home Loan Borrowers

Floating Rate Borrowers: Adhil Shetty, CEO of Bankbazaar.com, says, “Those with floating-rate loans tied to external benchmarks (like the repo rate) will not see changes in their equated monthly instalments (EMIs). However, they should monitor rate movements, as any signs of a future rate cut could mean lower interest payments. Consider partial prepayments to reduce the principal burden if feasible.”

Fixed Rate Borrowers: Those on fixed-rate loans remain unaffected in the short term. With a potential rate cut in early 2025, switching to floating rates might be advantageous if aligned with their financial goals.

2. Personal and Auto Loan Borrowers

Personal and Auto loans typically have higher interest rates compared to home loans. Borrowers should focus on prepaying high-cost debt if they have surplus funds, as this will save on interest costs over time.

3. New Borrowers

Prospective borrowers should thoroughly compare loan offers across banks and non-banking financial companies (NBFCs). Institutions may offer competitive rates or discounts to attract customers, especially if a cash reserve ratio cut is implemented.

Delaying borrowing decisions until 2025 could be prudent if a repo rate cut seems likely, as it would lead to lower borrowing costs.

Debt Consolidation: With rates remaining steady, this is a good time for borrowers with multiple loans to consolidate their debt into a single loan with a lower interest rate. This simplifies repayment and can lead to overall savings.

The RBI’s likely decision to keep the repo rate unchanged reflects its cautious approach amid complex economic dynamics. While the consistent policy stance offers short-term stability for borrowers, the outlook for 2025 suggests a potential easing of rates, depending on inflation trends and economic recovery.