RBI: The Reserve Bank of India has decided to retain its policy repo rate at 6.50 per cent and decided not to disturb the status quo on other key rates—the standing deposit facility at 6.25 per cent and marginal standing facility and Bank Rate at 6.75 per cent. In its 50th meeting since September 2016, the Monetary Policy Committee decided it by a majority of 4-2.
Decision and Rationale
Against this background, the MPC decision is super cautious in character. Although the growth trajectory has managed resiliency, headline inflation has been mostly driven by food inflation and remains a stumbling block. Headline, the CPI-based, inched up from 4.8 percent in April to May 2024 and then crossed the 5.1 percent mark in June, propelled mostly by food prices. In sharp contrast, core inflation stayed benign, remaining in the process entire: declining to historical lows.
Inflation Dynamics
In this backdrop, Governor Shaktikanta Das highlighted that even when food inflation was a large part of the headline, it was still a cause of concern. Now, cereals and products have a weight of around 46% in the CPI basket and added over 75% to headline inflation during the recent months. It is visible that steeply rising vegetable prices and high inflation, though on the decline, in all other major food subgroups have fuelled this inflationary uptrend. Although food inflation is expected to decelerate in Q2: FY25, it is likely to bounce back in Q3.
Inflation Projections
These projections would thus average out overall CPI inflation at 4.5% in FY25, with seasonal quarterly estimates of 4.4% in Q2, 4.7% in Q3, and 4.3% in Q4. CPI inflation in Q1FY26 is projected at 4.4%. Indeed, the dynamics of food prices and the recent spike in milk prices and mobile tariffs are expected to impinge on the near-term trajectory of inflation.
Food Inflation Impacts
He reiterated that food inflation was of greater order concern in the overall framework of inflation because food, by itself, carries a significant weight in the CPI basket. Moreover, if food prices stay elevated for a considerably long time, they may ultimately feed into elevated household inflation expectations for wages and then to goods and services prices, thereby maintaining continuous upward pressure on inflation even if food inflation moderates.
Outlook for Economic Growth
Domestic conditions are buoyant, with strong urban consumption, resilient rural consumption, robust investment demand, and auspiciously poised agricultural conditions over the near term. For FY25, real GDP growth is expected to be 7.2%, with quarterly estimates steady through the course of the year. The Q1FY25 growth number is, however, slightly revised downwards in view of updated information on corporate profitability, government expenditure, and accident rates in the output of core industries.
Even so, Governor Das pointed out that while the MPC could look past the transitory spikes in food inflation, the present environment calls for a watchful stance to avoid the second-round effects and to maintain the credibility of monetary policy. Commitment of MPC to “withdrawal of accommodation” is for balancing the concerns of taming inflation on one hand with ensuring continued support to economic growth on the other.