The Reserve Bank of India (RBI)-led Monetary Policy Committee (MPC) on June 7 left the key interest rates unchanged by a majority decision of the panel members, citing continuing risks on the inflation front.
The rate-setting panel, which has kept the rates on hold for over a year now, said it wants to see signs of retail inflation easing to a sustainable level before tweaking the rates. The repo rate, at which the RBI lends short-term funds to banks, stands at 6. 5 percent.
Inflation has been easing but not to the central bank's desired levels yet. India's retail inflation stayed largely unchanged at 4.83 percent in April against a 10-month low of 4.85 percent in March.
Time and again, the central bank has made it clear that after bringing down inflation to the target band of 2-6 percent, the next aim is to align with the 4 percent target, that too on a sustainable basis. As per the RBI’s own estimate in April policy review, inflation is likely to continue above 4 percent throughout this fiscal year, except for a likely blip in the second quarter.
If monsoon fails to be normal as predicted and impact of heatwaves reflect on food prices, the RBI may face fresh challenges on inflation management.
The central bank had, assuming a normal monsoon, earlier projected the CPI inflation for 2024-25 at 4.5 percent with the first quarter at 4.9 percent, the second quarter at 3.8 percent, the third quarter at 4.6 percent and the fourth quarter at 4.5 percent.
Interest rates in the banking system have been hovering on the higher end following the RBI's policy cues. Banks are struggling with a slower deposit growth far less than the credit growth, creating an asset-liability mismatch.
Earlier, most economists who participated in a Moneycontrol poll, had predicted that the central bank will retain status quo in key rates on June 7 as inflation was still beyond the 4 percent target.
The June 7 policy review is taking place within days of the Lok Sabha elections springing up a surprise verdict for the ruling BJP, which fell short of majority, defying exit poll predictions and general anticipation. The party has forged a coalition to rule the nation for the third term in a row. The central bank will keenly watch if the new government sticks to the fiscal consolidation path.
Global factors too will remain under watch. A surge in crude oil prices in the event of an escalation in the Israel-Iran conflict, coupled with the impact of a possible heatwave across India that may trigger a spike in food inflation, could upset the inflation calculation for the rate-setting panel.
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