Unchanged repo rate signals upbeat mood

RBI is not as anxious about inflation as it was a few months ago

It was expected that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would maintain the interest rates at its December review meeting. It did so, while declaring that it is still pursuing an actively disinflationary policy, though it is not as anxious about inflation as it was a few months ago. It was also upbeat about growth and had good numbers to project. The repo rate currently stands at 6.5 per cent. The MPC also voted 5-1 to remain focused on the withdrawal of accommodation. Governor Shaktikanta Das has said that the effort would be to ensure that inflation aligns with the central bank’s target of 4 per cent, and reiterated the committee’s readiness to take appropriate actions if warranted. It is the fifth time in a row that the RBI  has kept the lending rates unchanged. It has continued with its cautious approach in a bid to strike a balance between stability and growth.

Inflation has declined in recent months. Retail inflation, measured by the consumer price index, fell to 4.87 per cent in October, after touching 7.44 per cent in July. This was mainly because food inflation declined from 11.51 per cent in July to 6.61 per cent in October, as food prices, mainly prices of vegetables, eased. However, the near-term outlook is uncertain. Food prices may again see a rise in November and December. Crops could get impacted by climate problems, including a wayward monsoon, and the supply and demand balance may be affected. Rising global sugar prices are also a concern. Governor Das has noted that an increase in the prices of vegetables may push up inflation. The RBI has projected inflation to fall from 5.6 per cent in the third quarter to 5.2 per cent in the fourth quarter. It expects it to average around 4.3 per cent in the second and third quarters next year.  

The RBI is hugely optimistic about growth, and the better-than-expected 7.6 per cent growth in the second quarter has prompted it to upwardly revise its forecast for the financial year to 7 per cent from 6.5 per cent. It expects urban demand to sustain and rural demand to improve gradually. There are concerns over consumption but investment activity is getting a boost from government spending. This is bound to continue in the coming months. Exports are likely to look up. The RBI expects the trend to continue into the next year, and pegs growth at 6.7 per cent, 6.5 per cent and 6.4 per cent for the first three quarters sequentially. Governor Das has said that this is based on the assumption of a normal monsoon and evenly balanced risks. He is hopeful that in the midst of global uncertainties India will remain better placed than its emerging economy peers to withstand their impact.