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RBI keeps interest rates unchanged. Growth-inflation trajectories will determine policy action
In recent months, there has been a steady decline in inflation. Retail inflation, as measured by the consumer price index, fell to 4.87 per cent in October, after touching 7.44 per cent in July.
As was expected, the monetary policy committee of the Reserve Bank of India voted unanimously to keep interest rates unchanged in its December meeting. The repo rate currently stands at 6.5 per cent. Alongside, the MPC also voted 5-1 to remain focused on the withdrawal of accommodation. In his statement, RBI Governor Shaktikanta Das stated that policy has to be “actively disinflationary” to ensure that inflation aligns with the central bank target of 4 per cent, and reiterated the committee’s readiness to take appropriate policy actions if warranted.
In recent months, there has been a steady decline in inflation. Retail inflation, as measured by the consumer price index, fell to 4.87 per cent in October, after touching 7.44 per cent in July. The decline has been largely driven by food inflation which fell from 11.51 per cent in July to 6.61 per cent in October, as food prices, especially of vegetables, moderated. Alongside, there has also been a steady decline in core inflation, which excludes the more volatile food and fuel components. However, the near-term inflation outlook is uncertain. There is the possibility of an uptick in food prices in the months of November and December — as supply and demand in major commodities like cereals, pulses and sugar are in fine balance, climate related uncertainties over the rabi crop raise questions over the trajectory of food prices.
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RBI Governor Shaktikanta Das also acknowledged this, noting that high frequency indicators do point towards an increase in prices of vegetables which may push up inflation. The central bank has thus projected inflation to ease slowly from 5.6 per cent in the third quarter (October-December) to 5.2 per cent in the fourth quarter (January-March). Inflation is expected to trend towards the central bank’s target next year, averaging around 4.3 per cent in the second and third quarters.
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On growth, the central bank remains optimistic, saying that the economy shows remarkable resilience. While concerns over private consumption persist, the RBI sees urban demand as durable, and projects a gradual turnaround in rural demand. It notes that investment activity continues to be aided by government spending and expects the drag from external demand to moderate as exports turn around. After the second quarter GDP estimates surpassed expectations, the RBI has raised its forecast for the full year to 7 per cent, up from 6.5 per cent earlier.
But, this forecast implies that growth will slow down from 7.7 per cent in the first half to 6.25 per cent in the second half. For next year, too, the central bank’s projections are optimistic, pegging growth at 6.7 per cent in the first quarter, falling only marginally to 6.4 per cent in the third quarter. How this growth-inflation trajectory evolves, and whether it moves in line with the central bank’s expectations, will determine when the committee begins to ease policy rates.
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