For the fourth consecutive time, the six-member RBI MPC committee headed by Governor Shaktikanta Das decided to keep the repo rate unchanged at 6.50 per cent on Friday.
This was quite an anticipated move, as the experts predicted that amid global bond yields, dollar strength, and higher crude oil prices, the MPC will continue with a ‘withdrawal of accommodation’ policy stance, and maintain the pause.
Shaktikanta Das emphatically reiterated that inflation target is 4 per cent and not 2 to 6 per cent.
“Our aim is to align inflation to the target on a durable basis, while supporting growth. Our commitment to ensure financial stability reinforces our emphasis on price stability and anchoring of inflation expectations. This would keep inflation risk premium low and improve our competitiveness, productivity and growth potential,” he said.
At his speech, Governor explained the MPC’s rationale for these decisions on the policy rate and the stance.
Tomato and headline inflation
Taking into account the tomato story, he said the headline inflation had surged in July driven by tomato and other vegetable prices. It corrected partly in August and is expected to see further easing in September on the back of moderation in these prices.
“A silver lining amidst all these is declining core inflation. The overall inflation outlook, however, is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices. The MPC observed that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation. Economic activity, on the other hand, has remained resilient,” Das highlighted.
The transmission of the 250 bps increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence the MPC decided to remain focused on withdrawal of accommodation.
MPC remains highly alert
Governor mentioned that the MPC remains highly alert and prepared to undertake timely policy measures, as may be necessary, in order to align inflation to the target and anchor inflation expectations.
The need of the hour is to remain vigilant and not give room to complacency. Lessons from the past one and a half decades and from living through the global financial crisis and the taper tantrum tell us that risks and vulnerabilities can grow even in good times, he mentioned.
Speaking on MPC’s move, Madhavi Arora, Lead Economist, Emkay Global said the RBI reiterated caution and the current policy narrative is still more hinged to inflation uncertainty and liquidity management than on the fluid and uncertain global narrative as markets reprice ‘higher-for-longer’.
“As global financial conditions transmit with a lag, there could be further volatility ahead. Even as domestic inflation is likely to meet policy targets by end-FY24, elevated DM rates and record-low interest differentials pose a headwind for the RBI,” she said.
Amid the changing external dynamics, the policy prerogative would ensure financial stability, which may possibly even precede inflation management in coming months.
Also Read: RBI Monetary Policy Committee keeps repo rates unchanged to 6.50%
