The Reserve Bank of India's Monetary Policy Committee (MPC) has left the repo rate unchanged at 6.50 per cent, while also maintaining the stance of "withdrawal of accommodation to ensure that inflation aligns to the target, while supporting growth."
This is the seventh consecutive time that the MPC has left the benchmark rate at which the RBI lends money to commercial banks on hold and this was largely on expected lines.
Two key factors drive RBI's policy decision. On the one hand, GDP growth has been robust; in the October-December 2023 quarter, India's economy grew at a much better-than-expected, 8.4 per cent. On the other hand, CPI (consumer price index)-based inflation still trends above 4 per cent; February CPI was at 5.09 per cent. Importantly, while core inflation has declined, food inflation remains high (8.66 per cent in February) and volatile food prices remain a key concern.
RBI Governor Shaktikanta Das said on Friday that robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4.0 per cent. "As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions," he opined.
The RBI is mandated to keep inflation at 4 per cent, within a band of 2 per cent to 6 per cent. However, the Governor has for some time now stressed that the target is 4 per cent and not 2-6 per cent. This time too Das maintained that the MPC would remain resolute in its commitment to aligning inflation to the target.
RBI has projected CPI inflation in the current 2024-25 financial year at 4.5 per cent. It sees inflation at 4.9 per cent in the June quarter, 3.8 per cent in September, 4.6 per cent in December, and 4.5 per cent in the March quarter.
Das, however, pointed out that the tight demand-supply situation in certain categories of pulses and the production outcomes of key vegetables warrant close monitoring, given the forecast of above-normal temperatures in the coming months.
"Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices," he added.
On the growth front, the MPC noted that domestic economic activity continues to expand at an accelerated pace. With rural demand "catching up," consumption is expected to support economic growth this year. The global economy has also remained resilient with a stable outlook. However, Das raised concerns over high levels of public debt in advanced as well as emerging economies.
Debt to GDP ratios, which rose during the pandemic, remain elevated and are projected to increase further with rising interest burden and cost of borrowing, thus raising debt sustainability concerns, he pointed. The worsening debt situation in advanced economies could spill over into emerging markets by way of swings in capital flows and volatility in financial markets, he felt.
"These are dormant risks which could erupt abruptly," he said.
The central banks expect India's GDP to grow at 7 per cent in 2024-25, with the growth likely to be at 7.1 per cent in the first quarter, 6.9 per cent in the second quarter and 7 per cent in the third and fourth quarters.
"Our ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations. The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability," Das said.
He said that in the best interest of the economy, it was essential that CPI continued to moderate and align with the target on a durable basis and till this was achieved, the task remained unfinished.
Das noted that data as of December 2023-end showed capital and asset quality of scheduled commercial banks remained healthy. The financial indicators of non-banking finance companies also were in-line with that of the banking system, he added.
Banks, NBFCs and other financial entities must continue to give the highest priority to quality of governance and adherence to regulatory guidelines, he emphasised. Financial sector players should be mindful that they operate with public money, he said, adding that the RBI will continue to constructively engage with financial entities in this regard.
The RBI has been engaging with stakeholders for simplifying regulations and reducing compliance burden, he said. He noted that in pursuance of the recommendations of the Regulations Review Authority and the internal review groups, over 1,000 circulars have been withdrawn.
