This document breaks down the skill expectations to be achieved in K, 1 and 2. It mentions RR level 9 which I assume is reading recovery level but there are many different systems.
http://www.earlyactionforsuccess.com.au/pdf/Benchmarking2013.pdfI read a bit of the literature on repeating some time ago and it is not generally recommended even for students who are struggling as there is often little to be gained staying back.
If your DD is happy in that peer group I would stay with them while investigating and supporting any specific learning difficulties. To build self efficacy challenge is important. Your DD is young and she is learning to learn, how to meet a challenge and work through it. Lowering challenge through repeating won't necessarily be beneficial to self efficacy. Doing well on easy tasks contributes little to learning, meeting a challenge does.
Having said that, it can be a fine line between good struggle and hurtful struggle so I understand your concern. She doesn't sound as though she is falling behind though and developmental growth can occur in big leaps so you may find she takes off at some point.
I helped in my DDs class in kindergarten. There were kids struggling to learn their letters. None were held back and all were reading by end of year 1.
