The six-member monetary policy committee voted unanimously to maintain the status quo on the policy repo rate to tackle inflation, which remains vulnerable to recurring and overlapping food price shocks, and support resilient economic activity.

In all four meetings in the current financial year so far, the repo rate has been left unchanged at 6.50 per cent.

RBI Governor Shaktikanta Das emphatically reiterated that the inflation target is 4 per cent and not 2 to 6 per cent. Hence, monetary policy needs to remain actively disinflationary at the current juncture.

“We have identified high inflation as a major risk to macroeconomic stability and sustainable growth. Accordingly, our monetary policy remains resolutely focussed on aligning inflation to the 4 per cent target on a durable basis,” he said.

The MPC, which met on October 4, 5, and 6, 2023, also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target while supporting growth.

The committee’s decision on the status quo on the repo rate as well as its monetary policy stance is along expected lines.

‘On high alert’

“Declining core inflation is a silver line. But headline CPI (consumer price index-based) inflation remains vulnerable to recurring and overlapping food price shocks.

“The MPC remains highly alert and will not hesitate to take timely and appropriate action if the situation warrants,” Das said, adding that domestic economic activity continues to be resilient and India is poised to become the new growth engine of the world.

The Governor noted that the overall inflation outlook is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds, low reservoir levels, and volatile global food and energy prices.

The MPC cautioned that the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation.

Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points/bps (in the May 2022–February 2023 period), which is still working through the economy, the MPC decided to keep the policy repo rate unchanged.

The Governor observed that transmission of the 250 bps increase in the policy repo rate to bank lending and deposit rates is still incomplete and hence the MPC decided to remain focused on withdrawal of accommodation.

Active liquidity management: OMO sales

Referring to liquidity going into deficit mode over the last 2 or 3 weeks, Das attributed this mainly to advance tax and GST payments.

“Overall, if you see, the liquidity is in surplus. We have announced the withdrawal of ₹2,000 notes. So far, we have got back about ₹3.43 lakh crore.

“So, there is a substantial amount of liquidity that has been built up due to the withdrawal of ₹2,000 notes. Government spending has picked up and will pick up. So, this will also add a lot of liquidity to the system,” he said.

Further, in the festival season, demand for currency will go up. So, the currency in circulation will go up. That will, sort of, drain out some amount of liquidity.

“But overall, if you look at it, liquidity is in surplus. So, we have to be very watchful. There will be active liquidity management. The whole liquidity matrix has several moving parts. It is a turning pitch, and we will play our shots carefully.

“Going forward, while remaining nimble, we may have to consider OMO-sales (Open Market Operation sales of Government securities to suck out surplus liquidity) to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,” Das said, noting that excessive liquidity17 can pose risks to both price and financial stability