The RBI’s six-member Monetary Policy Committee (MPC) decided to stay the course, leaving the repo rate as well as the monetary policy stance unchanged, amid continuing food price shocks, which slowed the disinflation process in the first quarter (Q1) of FY25, and resilient and steady growth.
The policy repo rate (the interest rate at which Banks borrow funds from RBI to overcome short-term liquidity mismatches) was last changed in February 2023, when it was upped from 6.25 per cent to 6.50 per cent.
Two resolutions
The two resolutions – “to keep the policy repo rate unchanged“ and “to remain focused on withdrawal of accommodation” – were decided by a 4 to 2 majority.
Ashima Goyal (Emeritus Professor, IGIDR, Mumbai) and Jayanth R. Varma (Professor, IIM-Ahmedabad) were in minority, voting to reduce the policy repo rate by 25 basis points and change in stance to neutral. They stuck to their guns at the latest MPC meeting. At the last meeting too, they had voted along similar lines.
In his opening remarks at the bi-monthly monetary policy press conference, Governor Shaktikanta Das observed that: “Domestic economic growth is resilient. Inflation is moderating, but the pace of disinflation is uneven and slow...there is more distance to cover to align with the 4 per cent inflation target.”
That headline (retail) inflation, after remaining steady at 4.8 per cent during April and May 2024, increased to 5.1 per cent in June 2024, primarily driven by the food component remains stubborn.
The expected moderation in headline inflation during the second quarter (Q2) of FY25 on account of favourable base effects is likely to reverse in the third quarter, per Das’ assessment.
Domestic growth, however, is holding up well on the back of steady urban consumption and improving rural consumption, coupled with strong investment demand.
Stay the course
“Amidst this confluence of factors, the MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation.
“It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4.0 per cent on a durable basis...The commitment of monetary policy to ensure price stability would strengthen the foundations for a sustained period of high growth,” the Governor said.
Hawkish tone
HDFC Bank’s Economic Research team led by Chief Economist Abheek Barua, in a note, said the overall tone of the policy seemed hawkish with the RBI highlighting the risks around the stickiness in food inflation.
The food inflation forecast was raised by 60 basis points for Q2FY25 to 4.4 per cent (from 3.8 per cent) and 10 bps for Q3FY25 to 4.7 per cent (4.6 per cent) and now inflation forecasts for the next four quarters all stand above 4 per cent.
“With the RBI refraining from creating any space for a policy pivot, expectations of a change in October policy have reduced. That said, a pivot in Q3FY25 (by the December policy) is not completely off the table,” per the note.
Food inflation pressures
Das emphasised the MPC’s target is the headline inflation, wherein food inflation has a weight of around 46 per cent. Food inflation contributed to more than 75 per cent of headline inflation in May and June.
“With this high share of food in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation,” he said.
Therefore, the MPC cannot and should not become complacent merely because core inflation has fallen considerably.
Das said: “The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so.
“It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.”