RBI keeps repo rate unchanged at 6.5% for a second time in a row: A look at India’s inflationary trends

By: Yash Gupte

Prior to today’s meeting, the MPC had convened a meeting from April 3 to April 6 when it had decided to keep the repo rate unchanged and prior to that, the MPC had convened on February 8, 2023 when it had hiked the repo rate by 25 basis points to 6.50 percent.

In its second bimonthly monetary policy meeting of FY24, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) made the decision to maintain the repo rate at 6.5 percent. By a vote of 5 to 1, the MPC decided to keep concentrating on the removal of accommodations. The consumer price inflation dropped between March and April 2023 and went into the tolerance band, decreasing from 6.7 percent in 2022–2023, according to RBI Governor Shaktikanta Das, who also announced the policy.

“Headline inflation, however, is still above the target as per the latest data and is expected to remain so according to our projections for 2023-24. Therefore, 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,” Das said, adding that real GDP growth in 2022-23, on the other hand, has turned out to be stronger than anticipated and is holding up well.

Prior to today’s meeting, the MPC had convened a meeting from April 3 to April 6 when it had decided to keep the repo rate unchanged and prior to that, the MPC had convened on February 8, 2023 when it had hiked the repo rate by 25 basis points to 6.50 percent. That was the sixth repo rate hike announced by the RBI in Financial Year 2022-23. Previously, the central bank had raised the repo rate by 35 basis points 50 basis points in September, 50 basis points in August, 50 basis points twice in June and 40 basis points in May.

Unusual rains could cause food costs to rise sharply, and OPEC's recent decision to reduce output has also increased oil prices, which could increase imported inflation. The marginal fall in retail inflation indicates that the steps taken by Reserve Bank of India (RBI) to control the rising inflation in the country have delivered limited success. India’s retail inflation, which is measured by the Consumer Price Index (CPI), eased to 18 month low of 4.70 percent in April 2023, down from 5.66 percent in March 2023. The consumer food price inflation has also dropped down at 3.84 percent from 4.79 Percent in March 2023 and 5.95 percent in February 2023. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services. The urban inflation also dropped to 4.85 percent in April from 5.89 percent in the previous month. A similar trend was witnessed in the rural inflation as it dropped from 5.51 percent in March to 4.68 percent in April 2023.

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The MPC had increased the benchmark interest rate by 250 basis points in the previous fiscal year in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

Source: the Ministry of Statistics and Programme Implementation

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

The inflation rate crossed the RBI’s threshold of 6 percent in January (6.01 percent), which quickly jumped to 6.95 percent in March and hit the peak at 7.79 percent in April. This indicates that the prices of goods and services increased drastically in March and April. The primary reason behind the drastic increase was the disruption in supply chains caused by the Russia-Ukraine conflict. There was a drop in CPI in May, June and July as the government banned the export of wheat and sugar in order to increase its availability in the local market and cool down its prices. The retail inflation measured by the CPI came down below the mark of 6 percent in November for the first time in 2022. The fall in food prices and the implementation of the RBI’s tight monetary policy under which it has been increasing the repo rate had contributed in the decline in retail inflation in the month of November and December. But the trend was again reversed in the month of January 2023 as the retail inflation breached the mark of 6 percent and jumped to 6.52 percent.

The inflation rate for food and beverages in April was 4.22 percent, while the rates for alcohol, tobacco, and other tobacco products were 3.46 percent. The inflation rate for clothing and footwear was 7.47 percent. Additionally, housing inflation in April was 4.91 percent, while fuel and light inflation was 5.52 percent.  Miscellaneous inflation remained 4.92 percent.

Talking the wholesale inflation in India, the annual rate of inflation based on all India Wholesale Price Index (WPI) number was -0.92 percent for the month of April 2023 (over April 2022) against 1.34 percent recorded in March 2023. The Wholesale Price Index is published by the Office of Economic Advisor, Ministry of Commerce and Industry. As per the ministry, the reason behind a massive fall in the WPI in April can be attributed to fall in prices of basic metals, food products, mineral oils, textiles, non-food articles, chemical & chemical products, rubber & plastic products and paper & paper products. The ministry added that the month-over-month change in WPI for April 2023 over March 2023 remained at 0.0 percent. The index for primary articles increased from 175.0 (provisional) in March 2023 to 177.3 (provisional) in April 2023, an increase of 1.31 percent. Minerals (2.30 percent), Food Articles (1.45 percent), and Crude Petroleum & Natural Gas (3.47 percent), all saw price rises in April 2023 compared to March 2023.

Source: Ministry of Commerce and Industry

The wholesale price index based inflation or the wholesale inflation had peaked to 16.63 percent in May 2022 before showing a declining trend in the following months. The wholesale inflation has dropped to -0.92 percent in April 2023, the lowest in last 30 months. The fall in April WPI comes days after the Ministry of Statistics and Programme Implementation released the consumer price index or the figures related to consumer or retail inflation in India. Experts said that a declining trend was witnessed in the wholesale inflation due to the fall in global commodity prices.

Talking about the RBI’s MPC’s decision to keep the repo rate unchanged, Amar Ambani, Head Institutional Equities, Yes Securities said, “The decision on the stance was not unanimous, with one member dissenting on the same. We can attribute the dissent to the fact that, although liquidity conditions have improved lately due to higher government spending and gradual withdrawal of Rs2,000 denomination notes, this is a rapidly changing variable and the surplus in the banking system is expected to wane, on account of advance tax outflows and growing credit demand. Nevertheless, RBI will manage liquidity in a calibrated manner, characterised by Variable Repo and Reverse Repo operations, whenever the need arises.”