A Finance Ministry report on Tuesday flagged inflation as one of the “persistent downside risks”. It also feels that less transmission of policy rate review is likely to temper demand. However, it reiterated projection of strong growth during the current fiscal.

“With more than half of the current financial year witnessing positive developments in the economy, the full financial year should conclude as projected with a strong growth performance and macroeconomic stability. Yet, risks on the downside persist. Inflation is one of them that has kept both the government and the RBI on high alert,” Monthly Economic Review, prepared by the Economic Affairs Department said.

The observation comes at a time when retail inflation based on Consumer Price Index (CPI) dropped to 4.9 per cent in October from 5 per cent in September. It happened mainly because of lower prices of non-food and non-fuel products. However, food inflation remained at the same level in the month under consideration as it was in September. The central bank cautioned against rise in inflation on account of food prices.

In its monthly bulletin, the central bank said the only risk to the RBI’s resolve to align headline inflation with the target of 4 per cent is food inflation. Several constituent prices are already firming up – onions; tomatoes; cereals; pulses; and sugar – with the potential to disrupt the gains made in the last two months. Accordingly, in the RBI, we are bracing up for upticks in the readings for November and December, it said.

Interest Rate Transmission

Meanwhile, the report took note of the indication by Monetary Policy Committee (MPC) on policy rate transmission to the economy’s broader borrowing costs is incomplete. Last year, MPC raised policy report arte by 250 basis points. “The Weighted Average Lending Rate (WALR) on outstanding rupee loans is up by 105 bps over this period, while the WALR on fresh rupee loans is higher by 187 basis points,” the report mentioned.

Also read: India not ‘out of woods’ yet, high food prices key risk to CPI inflation: RBI report

Within the outstanding floating-rate loans segment, monetary policy transmission has been aided by an increase in the share of loans directly tied to the policy repo rate. These external benchmark-based lending rate (EBLR) loans, which are characterised by a full passthrough of any changes in the policy rates, account for over 50 per cent of outstanding floating-rate loans as of June 2023, up from 9.1 per cent in March 2020.

Loans priced off the Marginal cost-based lending rate (MCLR), which comprised 78.3 per cent of this segment in March 2020, have seen their share fall to 44.8 per cent in June 2023.  “Notwithstanding the above, the persistence of the difference in WALRs and the policy repo rate implies that monetary policy transmission is partial,” the MER said.

Inflationary pressures

As the decline in international crude oil prices and continued moderation in core inflation are likely to control inflationary pressures going forward. Recognising this, RBI has also indicated that any further tightening of monetary policy will likely occur when transmission is closer to completion and if the situation warrants, the report said,

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Highlighting projections of growth rate between 6.2 and 6.7 per cent by various agencies, the report said the government’s sustained investment push, healthy corporate profits, and a reduction in bank non-performing loans will likely keep investment buoyant despite elevated input costs. India’s exports are also expected to perform well, driven by strong performance in services exports.  

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