MUMBAI: As widely expected the Reserve Bank of India (RBI) maintained the status quo on the repo rate and its stance. Despite the recent rise in the prices of food items, the RBI left the repo rate unchanged at 6.50 per cent and said that the prices of vegetables are likely to correct in the coming months.
However high food items forced the central bank to revise its inflation projection upward to 5.4 per cent for the current fiscal year from the earlier projection of 5.1 per cent. The RBI has retained a growth outlook at 6.5 per cent for the current fiscal.
“The cumulative rate hike of 250 basis points undertaken by the MPC is working its way into the economy. Nonetheless, domestic economic activity is holding up well and is likely to retain its momentum, despite weak external demand,” said RBI Governor Shaktikanta Das, announcing the monetary policy review on Thursday.
“Considering this confluence of factors, the MPC decided to remain watchful and evaluate the emerging situation. Consequently, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent with the preparedness to act, should the situation so warrant. The MPC remains resolute in its commitment to aligning inflation to the 4 per cent target and anchoring inflation expectations,” he added.
Headline inflation, after reaching a low of 4.3 per cent in May 2023, rose in June and is expected to surge during July-August led by vegetable prices.
According to the governor, the vegetable price shock may reverse quickly, but possible El Nino weather conditions along with global food prices need to be watched closely against the backdrop of a skewed southwest monsoon so far.
“These developments warrant a heightened vigil on the evolving inflation trajectory,” said the governor.
There was a pick-up in headline inflation to 4.8 per cent in June due to an upturn in food inflation. On the positive side, inflation excluding food and fuel (core inflation) has softened by more than 100 basis points from its recent peak in January 2023. The month of July has witnessed an accentuation of food inflation, primarily on account of vegetables.
“Going by the past trends, vegetable prices may see a significant correction after a few months. The prospects of Kharif crops have brightened, thanks to improvement in the progress of the monsoon. Uncertainties, however, remain on domestic food price outlook due to sudden weather events and possible El Nino conditions in August and beyond,” said the governor.
With monetary transmission still underway and headline inflation remaining higher than the 4 per cent target, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.
As per the central bank, the momentum of overall economic activity in India continues to be positive. “GDP growth for 2023-24 is projected at 6.5 per cent with Q1 at 8.0 per cent; Q2 at 6.5 per cent; Q3 at 6.0 per cent; and Q4 at 5.7 per cent. Real GDP growth for Q1:2024-25 is projected at 6.6 per cent. The risks are evenly balanced,” the governor said.