Interest rates may not rise sharply from here, nor will they decline anytime soon. This is the key message from the Reserve Bank of India (RBI) after its latest monetary policy review. In a widely anticipated decision, the Monetary Policy Committee (MPC) decided to hold its policy repo rate at 6.5 per cent. But as the pause was accompanied by sharp increases in forecast Consumer Price Index (CPI) inflation and a reiteration of the 4 per cent inflation target, hopes for a rate cut early next fiscal have now dimmed.

The biggest shift in the policy stance came in inflation projections for the year ahead. Perhaps taking note of the recent flare-up in food and fuel, the RBI has pegged up the CPI inflation forecast for FY24 to 5.4 per cent from 5.1 per cent in the June policy. Inflation is now expected to spike to 6.2 per cent in Q2 FY24 and 5.7 per cent in Q3, before subsiding to 5.2 per cent by Q4. The MPC seems to be course-correcting after under-estimating the inflation trajectory earlier. It has however taken a wise call in deciding to look through the recent spikes in food inflation prints, for its rate decision. Vegetable prices are notoriously fickle and pegging rate decisions to seasonal eruptions have caused grief to RBI in the past. The wide skew in spatial distribution of the South-West monsoon is a concern for future food inflation prints. But this is better addressed through supply-side measures by the government. Recent curbs on rice exports and open market sales of buffer-stocked cereals, show that the Centre is alive to this risk.

On the face of it, the RBI’s decision to impound excess liquidity from banks by imposing a temporary 10 per cent incremental cash reserve ratio on deposits of the withdrawn ₹2,000 notes seems to be at variance with its dovish stance on rates. This move could nudge short-term rates up which is probably RBI’s intention too. On economic growth, the RBI has chosen to continue with its sanguine view. Despite flagging concerns about El Nino and weak external outlook, the central bank has retained its real GDP growth forecast for FY24 at 6.5 per cent. This appears optimistic compared to IMF’s forecast of 6.1 per cent. It remains to be seen if RBI’s view comes good as there are real risks to growth from the patchy monsoon and shrinking exports.

The policy statement also contained a couple of welcome proposals on regulatory changes. RBI’s decision to institute a transparent framework for banks to reset rates on floating rate loans is long overdue as retail borrowers are dogged by slow transmission of rate cuts and opaque communication of changed loan terms. The move to enable conversational UPI payments and promote offline UPI use, can give a fillip to the buoyant digital payment ecosystem.