There is no surprise on the rate decision today (read here). A status quo in rates was largely predicted by most economists due to the drop in retail inflation numbers and easing core inflation over the last two months.
So, what next?
There were enough indications in the policy statement and in the comments by top RBI officials at the post-policy presser that the central bank is in no mood to lower the guard on inflation fight any time soon.
First, the biggest clue lies in the continuation of the rate stance. The MPC retained the policy stance - withdrawal from accommodation - with five out of six members favouring the decision.
Changing the stance at this point to ‘neutral’ would have signalled the markets that the central bank is slowly moving into an accommodative stance (possibility of a rate cut), which probably the panel didn’t want to convey at this point. Hence the continuation of the policy stance.
Second, there was a clear emphasis on the 4 percent inflation target this time, unlike the previous policies where deliberations were focused on bringing down the target to below 6 percent upper band. Bringing inflation within the 6 percent upper band was the central bank’s first task. On Thursday, more than once, Governor Das and his deputies said the focus now is 4 percent medium target. It will require ‘close and continued vigil’ and further monetary policy actions are required to bring down the inflation target, Das said.
The messaging is clear: don’t expect softening of the policy stance till the time inflation aligns closer to the 4 percent target at least for a few months.
But when will that happen? As mentioned above, inflation has softened in the recent months. The retail inflation rate dropped sharply for the second straight month, hitting an 18-month low of 4.7 percent in April, but stays above the RBI target of 4 percent. Inflationary pressure on certain items such as milk and cereals remain a concern.
There are upside risks to the RBI’s inflation forecasts. Going ahead, two factors that the central bank will watch closely will be the impact of El Niño and the distribution of monsoon. The central bank will also take cues from how other global central banks are carrying the inflation fight ahead.
The RBI wants to clearly contain the inflation expectations. Das highlighted that the RBI surveys have shown that the central bank is moving closer to that goal. Inflation expectations of households for three months to one year ahead horizon have moderated by 60 to 70 basis points since September 2022, indicating earlier monetary policy actions are yielding the desired results.
Yet, the RBI wants to see the retail inflation aligned to the 4 percent target. Das explained that continuation of stance should be seen in the context of 4 percent inflation target. There is lot more clarity in the communication this time, compared with the earlier policies when the thinking on inflation wasn’t clear.
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