Wednesday, 09 Oct, 2024
Over 75 percent of headline inflation in May and June was caused by food inflation. Image Source: IANS
Monetary Policy Committee (MPC), led by the RBI Governor, made the decision to continue the policy of "withdrawal of accommodation" and to retain the benchmark repo rate at 6.5 percent
The Reserve Bank of India kept the repo rate unchanged at 6.5 percent for the 9th consecutive time. The six-member Monetary Policy Committee (MPC), led by the RBI Governor, made the decision to continue the policy of "withdrawal of accommodation" and to retain the benchmark repo rate at 6.5 percent. By a majority of 4 to 2, the MPC decided to maintain the policy rate. The Reserve kept its projections for real GDP growth in FY25 at 7.2 percent and CPI inflation at 4.5 percent. Before considering any change in the policy, RBI Governor Shaktikanta Das has repeatedly stressed the need to keep focussing on bringing inflation down to the 4 percent target in a sustainable manner.
As per the RBI, core inflation eased to record low in May and June. Core inflation, or the CPI excluding food and fuel, decreased from 3.2 percent in April to 3.1 percent in May and June of 2024. Food inflation, which makes up about 46 percent of the CPI basket, is nevertheless a cause for concern. According to the RBI, over 75 percent of headline inflation in May and June was caused by food inflation. In June, the costs of vegetables made up approximately 35 percent of the total increase. Governor Das emphasised that it's likely that the movement towards increased food prices persisted in July. Nonetheless, positive base effects might cause headline inflation to decline in July.
Radhika Rao, senior economist, DBS Bank said, “Policy guidance reinforced that domestic considerations will be prioritised, despite a sharp buildup in rate cut pricing for the US Fed. The RBI MPC retained its cautious tone on inflation, in the face of an anticipated passthrough from perishables price pressures and tariff adjustments. With domestic demand conditions calling for a focus on inflation, we expect the policy rate to stay on hold for the rest of the year.”
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 CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was last 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.
Source: Ministry of Statistics and Programme Implementation
The Reserve Bank of India kept its CPI inflation forecast unchanged for the FY 2024-25 at 4.5 percent but increased it for the quarter 2 of FY25 from 3.8 percent to 4.4 percent. The apex bank also increased its projection about the CPI inflation in Q3 of FY25 from 4.6 percent to 4.7 percent. For the last quarter, the forecast was lowered from earlier 4.5 percent to 4.3 percent. The RBI is expecting the inflation to remain at 4.4 percent in the quarter one of the next fiscal year.
The RBI made the decision to raise the frequency of credit information reporting to credit information companies (CICs) from monthly intervals to fortnightly basis, or at shorter intervals as agreed upon by CIC and credit institutions (CIs).
Rajesh Kumar, MD & CEO, TransUnion CIBIL said, “This is a very progressive move which will significantly strengthen the credit information ecosystem. With more frequent data reporting by banks and credit institutions, CICs will be able to update credit records faster and this will translate into more updated data being available for making informed lending decisions by credit grantors. This will also help in resolving consumer disputes faster based on updated data in the credit records. Credit information solutions help create economic opportunities for millions of people in India, and we take our responsibility to deliver accurate data very seriously.”
Parijat Agrawal, Head, Fixed Income at Union Mutual Fund said, “Although core inflation is in a disinflationary trend, volatile food inflation is a cause of worry. Growth remains robust as visible in high frequency indicators. Global economic slowdown and financial market volatility is something which the MPC may have to address going forward. The evolving growth inflation dynamics point towards rate cuts beginning from December policy.”
Along with the repo rate, the Standing deposit facility (SDF) rate also remained unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent.
