Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), decided to keep the repo rate – the main policy rate – unchanged at 6.5 percent and maintain the policy stance of ‘withdrawal of accommodation’ in the monetary policy. Both the decisions were taken in a majority 5:1 voting by the six-member MPC, headed by RBI Governor Shaktikanta Das.

WHY RBI KEPT THE POLICY RATES UNCHANGED?

  • The overall economic outlook remains upbeat despite some challenges in specific sectors.
  • While there has been broad-based moderation in inflation, higher food inflation keeps headline numbers elevated.
  • However, benign core inflation will comfort RBI as strong growth has mainly remained non-inflationary.
Two years ago, around this time, when CPI inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.

WHAT ARE INFLATION RATES IN INDIA?

Headline inflation has eased significantly from 5.7% in December to 5.1% in January and February. The fall in overall inflationary pressures over the past couple of months has been broad-based, with core inflation consistently trending downward, remaining below the 4% threshold for three consecutive months. However, the food and beverages inflation remain elevated, with a 7.8% increase in February, led by price pressures in vegetables (30.3%), pulses (18.9%), and spices (13.5%), according to CareEdge Ratings.

PREDICTIONS FOR THE FUTURE

  • The RBI has indicated that headline inflation will moderate in the coming months, aided by a favourable base effect lasting until July 2024.
  • The arrival of rabi harvests in the market along with expectations of a normal monsoon next year will also alleviate pressure on food prices.
  • The RBI will thus be inclined to adopt a cautious approach, preferring to assess the evolving risks associated with food inflation before making any changes in its decisions in the coming policies.
  • As guided by the March monetary policy bulletin, monetary policy will remain in “risk-minimisation mode” to align inflation towards the target while supporting growth.\
  • Given that the RBI Governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold for some more months – probably till October 2024.