Reserve Bank of India (File Photo | PTI)
The RBI has kept the policy repo rate unchanged at 6.5 percent for the eighth consecutive time. In a 4-2 vote, the central bank’s Monetary Policy Committee (MPC) decided to remain focused on the withdrawal of accommodation to ensure inflation progressively aligned with the target. There are clear signs of a divided MPC, with two members voting for a softening of stance as well as policy direction, as against only one dissenting member in past policy reviews.
The MPC’s cautious view to maintain status quo also comes when advanced nations’ central banks, including the European Central Bank, have begun rate cuts. But putting speculation to rest, RBI Governor Shaktikanta Das has emphatically reiterated that India’s monetary policy will be solely driven by domestic growth-inflation dynamics and not by the policies of advanced economies.
Citing resilience in domestic economic activity, the RBI revised its 2024-25 GDP forecast upwards by 0.20 percentage points to 7.2 percent, while the retail inflation estimate was kept unchanged at 4.5 percent. If the RBI’s growth projections materalise, it will be the fourth successive year of 7-plus percent growth. According to Das, multiple indicators such as core industries’ growth, services sector buoyancy, and manufacturing are exhibiting strength, while revival in rural demand is showing promise.
The central bank hopes the forecast of an above-normal monsoon will boost kharif production, and subsequently increase farm sector activity to strengthen rural demand. Seen another way, should monsoon play havoc, rural spending, which has been a drag on overall private consumption, may remain weak and dent the 2024-25 growth rate.
Although the headline inflation has moderated, upside risks persist—particularly in food inflation, which stood at 8.7 percent in April. Food continues to drive up the inflation gauge. Given pulses and vegetables are still rising in double-digits, household budgets are under severe pressure. Though the RBI expects Q2 inflation at 3.8 percent, the decline will be short-lived with inflation likely shooting past 4 percent in Q3 and Q4.
Analysts expect monetary easing in the coming quarters, supporting lower interest rates and credit demand, which can further fuel economic growth. But rate cuts will likely begin only in late 2024 or even early 2025. Uncertainty over global oil prices, continuing geopolitical conflicts, supply disruptions and commodity price volatility could make the last mile of disinflation protracted and arduous. The RBI must remain watchful.
