The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) abstained from altering the policy repo rate in its initial meeting of FY25 on Friday. This move was widely expected and aims to safeguard the ongoing disinflation process, ensuring that volatile food prices do not obstruct the alignment of retail inflation with the targeted 4 per cent.

RBI Governor Shaktikanta Das underscored the need for inflation, likened to an elephant, which has temporarily strayed but must be led back into the forest and kept there on a sustainable basis. Despite a notable decrease in inflation, it persists above the 4 per cent threshold.

Consequently, by a majority decision of 5 to 1, the MPC opted to maintain the policy repo rate at 6.50 per cent. This decision marks a continuation of the status quo maintained throughout all six meetings in FY24. The committee also resolved, again by a similar majority, to concentrate on withdrawing accommodation to facilitate a gradual alignment of inflation with the target while nurturing economic growth.

Governor Das stressed the importance of sustaining the momentum towards achieving a durable moderation in Consumer Price Index (CPI) inflation, which had subsided to 5.1 per cent between January and February 2024 from 5.7 per cent in December 2023. Until this objective is realized, the economic agenda remains incomplete.

Keeping Vigil

Looking forward, Governor Das noted that the robust growth outlook affords space to maintain focus on inflation and steer it towards the 4 per cent target. The RBI’s projection for CPI in FY25 stands at 4.5 per cent.

Addressing the foreseeable future, SBI Chief Economic Adviser Soumya Kanti Ghosh speculated on potential rate cuts commencing in October 2024, echoing sentiments of a prolonged phase of rate reductions guided by the RBI’s positioning towards a 4 per cent inflation target in FY26.

Amid the backdrop of sustained global economic resilience, Abheek Barua, Chief Economist and Executive Vice-President of HDFC Bank, observed a coordinated approach among central banks globally to uphold tight monetary policies and tackle the lingering challenge of inflation.

Inflationary Pressure

Economists Dharmakirti Joshi and Pankhuri Tandon from Crisil remarked on the lingering impact of previous rate hikes and regulatory measures on risky lending, coupled with fiscal consolidation, potentially dampening GDP growth in the current fiscal year.