KOLKATA: The Reserve Bank of India (RBI) is likely to hold repo rates steady for a long period as easing of core inflation and high real interest rates provide comfort, but frequent volatility in food prices – albeit transient – requires monetary policy makers to be vigilant, according to the minutes of the monetary policy committee (MPC) meeting.
“Even as headline inflation experienced considerable volatility, a silver lining has been the declining core inflation, supported by declining cost push pressures and ongoing transmission of past monetary policy actions,” RBI Governor Shaktikanta Das said at the MPC meeting.
But he cautioned about uncertainties, especially from adverse weather events, the playout of El Nino conditions, uncertainties in global food and energy prices and volatility in global financial markets.
“Monetary policy has to remain extra alert and ready to act, if the situation warrants. The hard earned macroeconomic stability has to be preserved,” he said.
Retail inflation, measured by Consumer Price Index, was seen at 5% for September, easing from 6.8% in August. The print was within the upper tolerance level of 6% much to the comfort of policymakers.
The underlying thought process at the MPC meeting, held between October 4 and 6, was to keep the policy measures sufficiently disinflationary without being overly restraining to make the economic growth a durable one.
“There are signs of a revival in investment now after more than a decade. Sharp financial tightening in 2011 and 2017 punctured such past revivals and led to persistent slowdowns,” external MPC member Ashima Goyal said. “So it is important to ensure a sustained and sustainable revival this time. There is no excess lending or an infrastructure boom this time, but a healthy gradual rise,” she added.
RBI projected GDP to grow at 6.5% for FY24, with the second quarter growth at 6.5%, third quarter at 6% and fourth quarter at 5.7%.
“The changes in the outlooks for both inflation and growth are quite modest, and the real repo rate is already quite high… The real interest rate based on projected inflation is high enough to glide inflation towards the target within a reasonable period,” Jayanth R Varma said. “It would therefore be useful for the MPC to communicate its intention to keep real interest rates high enough for as long as is necessary to drive projected inflation close to the 4% target on a sustainable basis,” he said.
RBI’s Rajiv Ranjan stressed on the fact that the full transmission of the cumulative 250 basis points repo rate rise since May last year is still not over and therefore and status quo would make a fine balance between the objectives of maintaining price stability and supporting growth.
“With growth and inflation broadly moving in anticipated direction, monetary policy needs to hold on while earnestly persevering with the disinflationary approach and remaining watchful with readiness to act if the situation demands,” he said.
“The anchoring of inflationary expectations is incomplete and muddied by uncertainty, going by the increase in variability of median expectations of households and the underperformance of revenues of businesses relative to their profits,” deputy governor Michael Debabrata Patra said at the meeting.
Source: The Economic Times