Rate decision signal of concern, uncertainty

Food inflation may not fall anytime soon; fuel prices may add to the fire

It was expected that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would keep the policy interest rate unchanged and retain the policy stance on the withdrawal of accommodation. In its October meeting last week, it decided unanimously to maintain the repo rate at 6.5 per cent. This is the fourth straight monetary policy review in which RBI has kept the rate unchanged. It is clear that there is cause for concern over inflation which had surged to a 15-month high of 7.44 per cent in July. It eased to 6.83 per cent in August but firmly remains above the mandated tolerance band. There is a possibility that it may rise again. Governor Shaktikanta Das warned that there may be a need for appropriate monetary action at some point.

The RBI has increased its second quarter retail inflation estimate to 6.4 per cent from 6.2 per cent, although it has kept its projection for the full year unchanged at 5.4 per cent. This is unlikely to be met, and the target may be achieved only in 2024-25, that too if the situation improves by then. Food prices drove up inflation in the recent past, and there are no indications that they will come down in the near future. Food inflation had reached 11.51 per cent in July. It has eased now but the situation is still uncertain. An irregular and uneven monsoon has affected the agricultural sector. Reservoir levels are low. The area under sowing for pulses is lower than last year. All crops are likely to be hit. If food inflation remains high for a period, it can again push up overall inflation. The World Bank has raised its inflation forecast for India from 5.2 per cent for the full year to 5.9 per cent. The external environment is also unfavourable. Crude prices have been steadily rising and they will impact price levels. The Hamas-Israel war that has broken out in West Asia is a new disruptive factor.  

The RBI has increased the GDP growth forecast to 6.5 per cent, which will be creditable in the present circumstances. It expects government spending and urban demand to aid growth in the near future. But rural demand is likely to suffer. If inflation goes out of control, a rate hike may become necessary, and that will badly affect growth. This is not envisaged at the moment, and the RBI may continue the pause on rates. The hawkish line in the RBI statement makes this clear. There are other challenges like the depreciation of the rupee, increased FII (Foreign Institutional Investment) outflows and declining foreign exchange reserves. That is why Governor Das said that the “pitch is changing and shots have to be played very carefully.”