ON EXPECTED lines, the Reserve Bank of India (RBI) Thursday left the repo rate unchanged at 6.5 per cent for the third time in a row amid concerns over rise in inflation. The six-member Monetary Policy Committee (MPC) revised its FY’24 consumer price index (CPI) inflation projection to 5.4 per cent from an estimate of 5.1 per cent announced in June, even as it retained its forecast for real gross domestic product (GDP) growth at 6.5 per cent.
“The MPC decided to keep the policy repo rate unchanged at 6.5 per cent with 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,” said RBI Governor Shaktikanata Das while announcing the monetary policy.
The repo rate is the rate at which the RBI lends money to banks to meet their short-term funding needs.
The MPC, in a 5:1 majority, decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. The RBI directed banks to maintain an incremental cash reserve ratio (I-CRR) of 10 per cent for banks in order to manage surplus liquidity in the banking system. The measure, which is temporary, will suck out above Rs 1 lakh crore of excess liquidity from the banking system.
The central bank has been mandated by the government to keep consumer price index-based inflation (CPI) at 4 per cent with a band of +/- 2 per cent. After easing to a low of 4.3 per cent in May, retail inflation accelerated to 4.81 per cent on the back rise in prices of vegetables and pulses.
Das expects retail inflation to surge during July-August led by vegetable prices. He, however, said that the recent spike in CPI inflation is likely to be short lived, going by the past trends.
Rate cut unlikely before ’25
AFTER THE revision, the RBI’s FY’24 inflation projection looks more realistic. But with the central bank emphasising it will continue its fight against price rise till CPI-based inflation comes in closer to 4% on a durable basis, it is unlikely that the rate cut will happen before the first quarter of FY’25.
“While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far. These developments warrant a heightened vigil on the evolving inflation trajectory,” he said.
He warned that if the spike or idiosyncrasies in CPI inflation, particularly food inflation, show signs of getting generalised, then the central bank may have to act.
“We have to go beyond maintaining Arjuna’s eye to deploy policy instruments. Let’s remember in this context that deployment of policy instruments are not just in terms of rates and stance, but there are other ways of dealing with it,” Das emphasised.
Besides revising upwards its CPI forecast for FY2024, the RBI has changed its inflation projections for the second and third quarters of the current fiscal. It now expects the second quarter CPI inflation to be at 6.2 per cent (vs 5.2 per cent expected in June policy) and 5.7 per cent (vs 5.4 per cent) in the third quarter.
Das said the investment activity has gained further steam on the back of government capital expenditure, rising business optimism and revival in private capex in certain key sectors such as metals, petroleum, automobile, chemicals, iron and steel, cement and food and beverages. The upcoming festival season is expected to provide support to private consumption and investment activity.
The RBI Governor, however, said the spillovers emanating from weak external demand and protracted geopolitical tensions pose risks to the growth outlook.
In order to absorb surplus liquidity from the banking system, the RBI introduced a 10 per cent I-CRR for banks. The excessive liquidity in the system is due to the return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows.
The I-CRR will have to be maintained on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28, the RBI said.
“This was considered necessary in the background of the liquidity overhang. We considered it desirable in the interest of price and financial stability. It will have an impact on the inflation situation also,” Das said.
The existing CRR has been left unchanged at 4.5 per cent. CRR is a percentage of total deposits that the banks have to maintain as liquid cash with the RBI.
The I-CRR will be reviewed on September 8 or earlier, ahead of the festival season.
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“We will ensure that there is adequate liquidity available in the system to meet the credit needs of the economy. We have done our internal assessment which shows that there will still be adequate liquidity left with the banking system to maintain their lending activities which they have been doing,” Das stated.
Commenting on the policy, State Bank of India Chairman Dinesh Khara said, “The RBI policy communication is nuanced, and has rightly exercised caution and warranted vigil on the inflation trajectory given the current jump in vegetable prices.”
According to Abheek Barua, Chief Economist and Executive Vice President, HDFC Bank, while the I-CRR decision is to be reviewed in September and could be a temporary decision but if inflation pressures linger on, the possibility of continued durable liquidity tightening is likely.
