RBI Maintains Repo Rate at 6.5%, Emphasizes Preserving Disinflation Gains

RBI maintains policy stance to preserve disinflation gains, warns of food inflation risks and growth sacrifice due to high rates. Vigilance needed to reach 4% inflation target amid global uncertainties.

Dil Bar Irshad
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RBI Maintains Repo Rate at 6.5%, Emphasizes Preserving Disinflation Gains

RBI Maintains Repo Rate at 6.5%, Emphasizes Preserving Disinflation Gains

The Reserve Bank of India (RBI) Governor Shaktikanta Das has stressed the importance of preserving the disinflation gains achieved over the last two years, despite risks from food inflation due to adverse weather events and geopolitical tensions. The Monetary Policy Committee (MPC) kept the repo rate unchanged at 6.5% and maintained a stance of "withdrawal of accommodation" in its April 2023 meeting.

Das stated that the success in the disinflation process should not distract from the vulnerability of the inflation trajectory to supply-side shocks, especially food inflation. "Preserving the gains in disinflation achieved over the last two years is essential," he emphasized. The RBI has projected a 7% growth for the current fiscal year, but cautioned that high interest rates could entail a growth sacrifice.

Why this matters: The RBI's decision to maintain the current policy stance is driven by the need to ensure a durable alignment of headline inflation with the 4% target. The central bank's focus on price stability is crucial for sustaining India's rising growth trajectory in the face of global uncertainties and inflationary pressures.

The MPC members expressed concerns about the diverging trajectory between food and core inflation, with food inflation remaining a concern due to factors like the shallow winter price correction and the likelihood of above-normal temperatures during the summer. They also highlighted the risks posed by lingering geopolitical tensions and their impact on commodity prices and supply chains.

While the MPC acknowledged the progress in monetary policy transmission and anchoring of inflation expectations, they emphasized the need to remain vigilant and tread the "last mile of disinflation" with extreme care. RBI Deputy Governor Dr. Michael Debabrata Patra noted that conditions are not yet in place for any let-up in the restrictive stance of monetary policy, as headline inflation is expected to remain in the upper reaches of the tolerance band until favorable base effects come into play in the second quarter of 2024-25.

Five of the six MPC members voted for the status quo, while one member, Professor Jayanth R. Varma, voted for a 25 basis point reduction in the repo rate. Varma argued that the current real policy rate of 2% is excessive and imposes significant costs on the economy due to the short-run Phillips curve, leading to a growth sacrifice.

The RBI has projected retail inflation for 2024-25 at 4.5% and real GDP growth at 7%. Governor Das emphasized that the strong growth momentum gives the RBI the policy space to focus on lowering inflation. However, he cautioned that overlapping food price shocks and lingering geopolitical tensions are adding uncertainties to the inflation trajectory, requiring the RBI to tread the "last mile of disinflation with extreme care."

Key Takeaways

  • RBI maintains repo rate at 6.5% and "withdrawal of accommodation" stance.
  • RBI emphasizes preserving disinflation gains despite food inflation risks.
  • MPC concerned about diverging food and core inflation, geopolitical tensions.
  • RBI projects 7% GDP growth, but cautions on growth sacrifice from high rates.
  • One MPC member voted for 25 bps rate cut, arguing real rate is excessive.