10-Aug-2023
2 mins read
On Thursday, the Reserve Bank of India (RBI) held its Monetary Policy Committee (MPC) meeting. While the conclusions of its meetings always grab attention, this one was of particular interest to people because of the current state of the Indian economy and global uncertainties.
Repo Rate Remains Unchanged
A pattern RBI seems to follow over recent cycles, it has announced to keep the repo rate steady at 6.50%. The decision of keeping the repo rate unchanged for the third time was taken by the six-member MPC, led by RBI Governor Shaktikanta Das.
Background to the Decision
Before this streak of unchanged rates, the central bank’s committee had elevated the repo rate by a significant 250 basis points from May 2022 to February 2023. This decision was influenced by various factors, including trying to combat inflation and stabilizing the economy.
Retail Inflation: A Close Watch
A primary concern for the RBI has always been to ensure that retail inflation remains in check. The target is to keep it within the 4% mark. However, recent trends indicate some pressure on this front. After touching a relatively comfortable 4.3% in May 2023, the headline inflation showed a rise in June and is expected to increase further in July and August, predominantly driven by escalating vegetable prices.
For the current fiscal year, the RBI projects the retail inflation to be:
- Q2: 6.2%
- Q3: 5.7%
- Q4: 5.2%
Other Forecasts and Concerns
Governor Das mentioned that the Consumer Price Index (CPI) inflation forecast for FY2023-24 has been revised upwards to 5.4% from the earlier 5.1%, attributing the change to shocks in vegetable prices. However, the GDP forecast remains unchanged at 6.5%.
The RBI also expressed concerns over potential El Nino weather conditions, rising global food prices, and the irregular Southwest Monsoon. Such developments mandate vigilant monitoring of the inflation trajectory in the coming months.
Commitment to Inflation Target
Despite the challenges and uncertainties, the RBI remains committed to its primary objective: keeping inflation around the 4% target. The cumulative 250 basis point rate hike previously made by the MPC is expected to progressively impact the economy. Even amid these rate hikes and potential external demand weaknesses, the domestic economy seems resilient.
Liquidity Tightening
In a noteworthy move to control liquidity, the RBI has directed banks to allocate a larger segment of their incremental deposits as reserves. Effective from the August 12 fortnight, banks are mandated to maintain an incremental cash reserve ratio of 10% for the deposits acquired between May 19 and July 28.
In Conclusion
RBI’s recent MPC meeting underscored its commitment to maintaining economic stability, with inflation control as its paramount concern. While the path ahead might have its challenges, especially with unpredictable weather patterns and global economic shifts, the RBI’s vigilant approach seeks to navigate India’s economy towards stable growth.