RBI keeps eyes on inflation, finger on pause button

RBI retains repo rate at 6.5%. Bond yield reaches 7.12%. Governor Das emphasizes inflation progress, stable financial sector, and robust GDP growth.

Shayan Ghosh, Shivangini
First Published5 Apr 2024
RBI MPC Announcement: RBI keeps benchmark repo rate unchanged at 6.5%, said, Governor Shaktikanta Das on April 5. (Photo: PTI)
RBI MPC Announcement: RBI keeps benchmark repo rate unchanged at 6.5%, said, Governor Shaktikanta Das on April 5. (Photo: PTI)

Mumbai: The monetary policy committee of the Reserve Bank of India (RBI) on Friday continued its prolonged pause in the key repo rate at 6.5%, pursuing durable signs of easing inflation amid volatile food prices.

Although the policy was unsurprising, the 10-year benchmark sovereign bond yield rose to 7.12% during the policy announcement, and closed at the same level, its highest closing level since 31 January. The equity markets stayed flat, with Sensex ending the day at 74,248.2 points.

The policy was on expected lines, showing how the thinking of market participants, analysts, media, and others was well-aligned, RBI governor Shaktikanta Das said at the beginning of the post-policy press conference. The rate-setting committee also retained the stance of “withdrawal of accommodation”.

Das pointed out five aspects of the latest MPC decision. First, inflation is moderating and gross domestic product (GDP) growth is robust. Second, the MPC remains focused on aligning inflation to its target on a durable basis and is satisfied by the progress made under disinflation, although the task is not yet finished. Third, the financial sector continues to be stable. Fourth, the external sector continues to be resilient. Lastly, as RBI moves towards a century of its existence — currently at 90 years — the central bank will continue to focus on preserving financial stability and promoting the financial sector and a payments system that is robust, resilient and future-ready.

In its seventh consecutive policy where it held the repo rate, the MPC also decided to retain its earlier projections of growth and retail inflation for the current financial year (2024-25). While inflation is estimated at 4.5% in FY25, growth is pegged at 7%. Going by the second advance estimates of FY24 GDP growth at 7.6%, the average growth over the last three years would come to 8%. Growth in FY25, estimated by RBI at 7%, would thus be affected by some base effect.

Das said that when retail inflation had peaked at 7.8% in April 2022, “the elephant in the room was inflation”, a phrase used to denote something obvious that people avoid discussing. He then went on to take the analogy even further.

“The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” said Das, explaining that it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis.

“The elephant moves at a slow pace. The last mile of disinflation is always challenging and sticky,” said Das.

In fact, the central bank's pachyderm problem emanates from food inflation, which Das said “continues to exhibit considerable volatility impeding the ongoing disinflation process”. Food is currently assigned a 46% weightage in the headline consumer price index (CPI) basket. “High and persistent food inflation could unhinge (the) anchoring of inflation expectations which is underway.”

Das expressed confidence in the performance of the Indian economy, saying it has been supported by fixed investments and an improving global environment. In support of the optimism, he said that rural demand is catching up, and consumption is expected to support economic growth in 2024-25. Urban consumption, he said, stayed buoyant. That apart, resilience in cement production, together with strong growth in steel consumption and production and import of capital goods, further support the investment cycle, he said.

Das said that outlook on investment activities is bright on the back of an upturn in the private capex cycle that is turning more broad-based. There is also the support from the government's capital expenditure programme; strong balance sheets of banks and corporates; rising capacity utilisation; and strengthening business optimism.

Bankers lauded RBI’s unwavering focus on containing inflation.

“The recent re-emergence of reflationary pressures from new supply side disruptions has posed a challenge to central Banks, globally. Against this backdrop, the RBI’s resolute focus on achieving the last mile of disinflation is a very welcome step and will ensure macroeconomic stability,” said Zarin Daruwala, chief executive officer, India & South Asia, Standard Chartered Bank.

Ashu Khullar, chief executive, Citi India said there are already promising signs of success in the disinflation process, but RBI is keen to extend this till the 4% CPI target is reached and growth is fostered on a sustained basis.

Economists now expect the central bank to announce the first set of rate cuts only in the second half of 2024, with some even looking at the last three months of the year. Taking into account the governor’s reiteration of durable decline in inflation to align with its target and RBI’s own price rise forecast, experts believe it could start in Q2 of FY25. RBI projected retail inflation to decline to 3.8% in Q2, before breaching the 4% mark again in the next two quarters.

“The central bank remained optimistic on growth – pegging it at 7% for FY25 – and said this provides space for monetary policy to remain tight and focus on inflation. Consequently, the chances of a rate cut have been pushed forward into the second half of FY25,” said Abheek Barua, chief economist and executive vice-president, HDFC Bank.

Others pointed out how the tone of the policy, like its stance, remained unchanged. “The tone of the statement remained hawkish, as has been the case for the past few meetings, though the Governor noted that since the previous meeting, growth and inflation outcomes have been favourable,” Barclays said in a note to clients.


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