RBI Monetary Policy: A Critical Update on Interest Rates
The Reserve Bank of India (RBI) is concluding its three-day Monetary Policy Committee today. Governor Shaktikanta Das will unveil the decision on interest rates that will have huge ramifications for the Indian economy. The meeting, which was opened on October 7, has caused a lot of excitement because the central bank has kept the repo rate unchanged at 6.50% for the last nine sessions, which tells of a cautious approach in balancing the still ongoing inflationary concerns, while its promotion of economic stability and growth can never be ignored.
Why is this MPC meeting critical?
This MPC meeting is crucial as it is likely to decide the direction of interest rates in the near future. Factors that would weigh the RBI decision are primarily domestic, with a few global factors:
- Inflation Trends: While All India Consumer Price Index (CPI) inflation did ease in to 3.65% in August, remaining satisfactorily within the RBI's set target range of 2-6%, food inflation is still prevalent at 5.65%. The current rate already crosses the central bank's medium-term target of 4%, so that brings in the talk of persistent pricing pressures in the economy.
- Global Economic Uncertainties: Global crude oil prices have risen due to political tensions in the West Asia region. Oil price volatility has the potential to impact domestic inflation rates and overall economic growth directly at any given time.
- Post the pandemic: the RBI has maintained a status quo on the repo rate in order to boost the economic recovery process. The RBI, through this cautious step, is praying that it will help create an economy where growth and inflation are sound.
Monetary Policy Statement by Shri Shaktikanta Das, RBI Governor - October 09, 2024, at 10 am https://t.co/qH6y2PRPrS— ReserveBankOfIndia (@RBI) October 9, 2024
What is Being Predicted by Economists?
Economists following the central bank's decision believe the RBI will delay rate change decisions but position itself to tackle emerging risks of inflation. Here is what some of the experts are saying,
- For its part, M. Govind Rao of the Fourteenth Finance Commission believes that although core inflation is still within acceptable limits, perhaps it's about time for the RBI to turn the political heat down and alter its stance from "withdrawal of accommodation" to a more neutral stance. That will thus give the RBI elbow room to react to changing trends in inflation without knocking the economy on its skull.
- For his part, Chief Economist at Infodemics Ratings, Manoranjan Sharma, believes that with increasing geopolitical tension, volatile crude oil prices, and ongoing food inflation, the RBI can opt for a "neutral" policy without repo rate change today. He believes that the RBI can delay the rate action till December and in this manner, it can assess the changing economic scenario.
Analysis of RBI's Policy Strategy
The RBI way is to talk up Headline Inflation control while aligning the country's growth objectives. Hence, RBI Governor Shaktikanta Das will likely elaborate on the outcome of the decision by the MPC and point out the factors that have driven it. Here are the key considerations, going into details:
- Control over Core Inflation: This too has been under control on the account of exclusion of food and fuel prices. A good sign, yet this hints the successful tinkering of the RBI at least till now toward containing widespread price increases.
- Impact of Global Oil Prices: With global oil prices on the upswing, triggered primarily by geopolitical tensions over in West Asia, India has a potential threat to its import bill and inflation forecast. A sharp rise in further oil prices could push up inflation still more, which calls for quick action from the central bank.
- Food Inflation Remains High: Food inflation is also quite high, at 5.65%. Of course, the overall CPI stayed within the target band, but food inflation still remains a big cause for concern. And the challenge for the RBI will be to manage this upward movement of food inflation without letting it strangle growth or push interest rates too much higher.
- External Market Uncertainties: Global market is volatile and correct cautionary policy from the central bank has saved Indian economy from external shocks. With ongoing geopolitical and economic uncertainties, the RBI strategy is to maintain stability, keeping an eye on evolving risks.
What to expect from Interest Rate?
The statement from Governor Das today will be under strict watch for policy changes of the central bank. While economists expect the RBI to maintain its present repo rate, even a hint of policy flip may come into play against the prospects later on. A shift from "withdrawal of accommodation" to a "neutral" stance would give more room to respond on the part of the central bank to both requirements for growth and to rein in inflation as the situation unfolds.
The trend the monetary policy will set today for the months ahead and interest rates as well as broader economic policies at the global levels were the tough challenges that RBI stands at both at domestic and global levels.
Inputs by Agencies
Image Source: Multiple Agencies
Ⓒ Copyright 2024. All Rights Reserved Powered by Vygr Media.
