The Monetary Policy Committee kept the repo rate unchanged at 6.5 percent, but RBI Governor Shaktikanta Das cautioned that inflation concerns in the second half of the year need to be watched and addressed at an appropriate time
RBI Governor Shaktikanta Das
Image: Punit Paranjpe / AFP
India’s central bank followed the script. No surprises and no shocks either. As widely expected, it delivered a status quo credit policy. The six-member rate-setting panel unanimously voted to hold the benchmark repo rate at 6.5 percent and five members voted to continue with the policy stance and focus on withdrawal of accommodation. The Reserve Bank of India (RBI) marginally lowered its inflation forecast to 5.1 percent from 5.2 percent, but kept its growth estimate unchanged at 6.5 percent for FY24.
Although the RBI tweaked its inflation forecast by 0.1 percent for the current financial year, it is on the front foot. A closer look at the growth and inflation projections indicates that the RBI is cautious about the second half of FY24—when it expects growth to lose momentum and inflation to rise (see table). There are concerns around higher government spending in the run-up to elections and the impact of weather conditions on food prices. Clearly, despite the recent moderation in price levels, the war against inflation is far from over.
In fact, RBI Governor Shaktikanta Das reiterated, “Let me re-emphasise that headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4 percent, going forward.” This is an important policy cue for the rate trajectory in the coming months. “While risks to near-term inflation have moderated somewhat, pressure remains during the second half of the year which needs to be watched and addressed at an appropriate time,” he said.
Das highlighted the need to be hawk-eyed on the evolving inflation situation even though inflation expectations of households for three months to one-year-ahead horizon moderated by 60 to 70 basis points since September 2022, indicating that monetary policy actions are yielding the desired results. This explains why five out of six members voted to keep the policy stance unchanged.
“Close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. Taking all of these factors into account, the Monetary Policy Committee decided to remain focussed on withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth,” Das added.