Steady repo rate good for new government
It was expected that the Reserve Bank of India (RBI) would stick to its rate regime, and it has done so. The Monetary Policy Committee (MPC) held the rate steady for the eighth consecutive time at its meeting last week. It took a 4-2 decision to continue the status quo in terms of the rates and ‘withdrawal of accommodation’. The repo rate, the interest rate at which the RBI lends money to banks, will remain at 6.5 per cent. The reasons that the MPC usually takes into consideration for its rate decisions were in play to justify its decision. But there is another factor that may also be mentioned. The MPC decision spared the newly sworn in government a situation where it would have to deal with a rate change in its early days.
The RBI’s main consideration in deciding the repo rate is the need to maintain price stability. It is mandated to target a retail inflation level of 4 per cent. Retail inflation is well above 4 per cent. So the MPC did not have a choice in the strict terms of its responsibility, because inflation is still not under control. Headline inflation has seen some moderation this year after remaining at high levels in the past. But the decline has been slow as it moved from 5.1 per cent in February to 4.8 per cent in April. Governor Shaktikanta Das was cautious on inflation and noted that the global commodity prices were also high this quarter. He has retained last quarter’s inflation forecast of 4.5 per cent for this financial year, which is above the RBI’s limit. Food inflation is at more elevated levels. The RBI did not want to take a chance even though there is a forecast for a good monsoon which can cool down inflation.
At the same time, the RBI has strong and well-founded optimism on growth and has raised its GDP forecast for the current financial year from 7 per cent to 7.2. It has noted that there are reliable and resilient indicators of accelerated growth. The monsoon is expected to be above normal, and that augurs well for agriculture and rural demand. Manufacturing and services are likely to keep their growth momentum. The momentum in these sectors can lead to a revival in private consumption, which has flagged in the past. The central bank noted: ‘’Investment activity is likely to remain on track, with high capacity utilisation, healthy balance sheets of banks and corporates, government’s continued thrust on infrastructure spending, and optimism in business sentiments.” When growth was looking strong, there was no case for a rate cut.