In its recent meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) opted to maintain the status quo on interest rates, with the repo rate holding steady at 6.5%. Additionally, the committee affirmed its commitment to the gradual withdrawal of accommodative monetary policy measures, signaling a cautious approach amidst evolving economic conditions.
Key Outcomes
- GDP Growth Forecast: The RBI retained its GDP growth forecast for FY25 at 7%, slightly lower than the 7.6% projected by the National Statistical Office (NSO). Quarter-wise projections foresee growth rates of 7.1% in Q1, 6.9% in Q2, and 7% in both Q3 and Q4.
- Policy Rates: Both the policy repo rate under the liquidity adjustment facility (LAF) and the standing deposit facility (SDF) remained unchanged at 6.50% and 6.25%, respectively.
- Inflation Targeting: The MPC remains steadfast in its commitment to align inflation with the 4% target within a band of +/- 2%, while concurrently supporting growth objectives.
Reasons for Maintaining Interest Rates Unchanged
- Food Inflation: Despite broad-based moderation in inflation, persistent higher food inflation, fueled by global uncertainties and El Nino effects, continues to pose challenges. The arrival of rabi harvests and expectations of a normal monsoon next year may offer relief, but pressures in vegetables, pulses, and spices persist.
- Festival Season: The ongoing festive season is expected to stimulate liquidity and demand, influencing the decision to maintain rates unchanged.
- Crude Oil Prices: Although crude oil prices have softened, global uncertainties stemming from regional conflicts and supply chain disruptions contribute to the cautious stance.
- Resilient Economic Activity: Despite prevailing uncertainties, the Indian economy exhibits resilience, instilling confidence in the decision to hold benchmark rates steady.
- Previous Policy Measures: Acknowledging the impact of previous policy repo rate hikes, the MPC recognizes the ongoing influence on the economy, supporting the decision to maintain rates.
- Inflation Risk Management: Holding rates steady serves as a precautionary measure to monitor inflationary pressures closely and respond promptly if necessary.
Understanding Inflation Targeting
Inflation targeting, adopted by the RBI in 2016, aims to manage inflation within a specified target range. The RBI's primary objective is to achieve a 4% inflation target with a comfort zone of +/- 2%. While this framework provides a structured approach to monetary policy, it faces limitations such as addressing supply-side shocks, exchange rate volatility, socio-economic impacts, and data availability challenges.
The MPC's decision reflects a balanced approach aimed at navigating evolving economic dynamics while maintaining price stability and supporting sustainable growth in India's economy.
