In a recent announcement, the Reserve Bank of India (RBI) underscored the significance of addressing high inflation to maintain macroeconomic stability and sustainable growth. RBI Governor Shaktikanta Das emphasized the central bank’s commitment to achieving a durable 4% inflation target while keeping benchmark interest rates unchanged for the fourth consecutive meeting.
Monetary Policy Focus on Inflation Alignment:
RBI Governor Das highlighted that the Monetary Policy Committee (MPC) is steadfastly dedicated to realigning inflation with the 4% target. The MPC has adopted a majority decision to withdraw accommodation, thereby fostering inflation alignment while supporting economic growth.
Reasons for Unchanged Interest Rates:
Despite a decline in core inflation (CPI excluding food and fuel components), the overall inflation outlook remains uncertain. Factors contributing to this uncertainty include reduced kharif sowing for essential crops, low reservoir levels, and fluctuations in global food and energy prices. The MPC is concerned about recurring food price shocks potentially leading to sustained headline inflation. Nevertheless, the Indian economy has displayed resilience.
Monetary Policy Repo Rate Status:
Taking into account evolving inflation-growth dynamics and a cumulative policy repo rate hike of 250 basis points, the MPC has decided to maintain the policy repo rate at 6.50% in the current meeting. The MPC remains vigilant and ready to implement timely policy measures as needed to align inflation with the target and anchor inflation expectations.
Risks to the Economic Outlook:
Governor Das acknowledged several risks to the economic outlook, including geopolitical tensions, global economic slowdown, volatility in financial markets, and uneven monsoon rains. These factors necessitate careful monitoring of incoming data and distinguishing between durable and transitory elements of price shocks.
Inflation and Growth Forecasts:
RBI retained its real GDP growth forecast for 2023-24 at 6.5% and its average CPI inflation forecast for the current fiscal year at 5.4%. However, the MPC increased its headline inflation projection for the second quarter of the fiscal year by 20 basis points to 6.4%.
Commitment to the 4% Inflation Target:
Governor Das emphasized that the RBI’s inflation target remains at 4% and not within the range of 2 to 6%. The central bank aims to actively pursue anti-inflationary measures while supporting growth to achieve this target.
Liquidity Management and Financial Stability:
RBI will actively manage liquidity in line with its monetary policy stance and conduct Open Market Operations (OMO) sales as necessary. The central bank is closely monitoring emerging trends in the financial sector and expects banks and non-banking financial companies (NBFCs) to strengthen their internal surveillance mechanisms.