Monetary policy must stay on course to align inflation with target: RBI bulletin

The RBI’s six-member Monetary Policy Committee (MPC) is scheduled to meet next August 8-10

India’s monetary policy has to stay the course on the “arduous last leg of the journey” to align inflation with the target, Reserve Bank of India (RBI) staff have said in the latest edition of their State of the Economy article, citing the recent spike in food prices.

The State of the Economy article, published on July 17 as part of the monthly RBI bulletin, does not represent the views of the central bank.

“Food price spikes typical of the onset of the monsoon drove up headline inflation in June, corroborating the monetary policy committee’s (MPC) view that the fight against inflation is far from over,” according to the article.

India's headline retail inflation ended its four-month falling streak and rose to 4.81 percent in June from 4.31 percent in May, pushed up by a rise in vegetable prices. CPI inflation has been above 4 percent for 45 months in a row.

The RBI’s six-member Monetary Policy Committee (MPC) is scheduled to meet next August 8-10 to deliberate and decide on the key policy benchmark rate. It is widely expected that the central bank will continue to stay on hold on interest rates.

Rate hike expectations rise

The article further said that market expectations of future interest rates have gone up in response to the hawkish policy stance with many central banks, despite reducing the pace of interest rate increases, signalling their readiness to increase interest rates further and keep them high as long as they see the labour market as the key inflation risk.

“In response, market expectations of future interest rates have gone up, equity prices have flattened and bond yields have hardened. Corporate bond issuances have stabilised, with those in high-yield segments virtually drying up,” it said.

India’s central bank raised the benchmark repo rate by 250 basis points (bps) to 6.5 percent in 2022-23 but has kept it unchanged so far in 2023-24. While the RBI maintained the status quo on interest rates in April and June, it warned that it stood ready to take further monetary action “promptly and appropriately” as needed to keep inflation expectations firmly anchored and to bring the rate down to the 4 percent target.