As expected, the Monetary Policy Committee (MPC), which sets interest rates in India, on August 10 kept the repo rate unchanged, citing the continuing threat from inflation in Asia's third-largest economy.
The decision came in the wake of a recent spike in inflation triggered by high prices of food items. One basis point is one-hundredth of a percentage point. The MPC kept the repo rate, or the rate at which the central bank lends short-term funds to banks, at 6.5 percent.
The language of the monetary policy suggested that the RBI is clearly on a wait-and-watch mode as inflationary fears continue to loom large over the economy despite a decline in the recent months.
Since May 2022, the RBI has hiked the rates by 250 bps as part of its fight against inflation. The country's retail inflation hit 4.81 percent in June from 4.31 percent in May, pushed up by a rise in vegetable prices and fading away of the favourable base effect.
On Thursday, announcing the decision, Reserve Bank of India (RBI) Governor Shaktikanta Das repeated his caution on the inflation front.
Despite the jump in the June inflation number, if one looks at the larger pattern in the last four months, inflation has remained largely under the 6 percent upper band. In May, CPI inflation was 4.25 percent, compared to 4.5 percent in April and 5.66 percent in March.
Economists had, however, thought that despite falling inflation, the MPC might continue with a cautious approach and would hold the rates steady in the August round of the monetary policy review, which is exactly what the MPC did on Thursday.
In the previous policy, the rate-setting panel had clearly stated that the next target is to bring it closer to the 4 percent medium-term target, which is still some time away.
Also, there are continued upside risks to inflation, which could influence food prices, such as the El Niño and the likelihood of erratic monsoon distribution. A closer look at the June numbers reveals that the food prices have played the villain again, with the Consumer Food Price Index of the CPI rising 2.5 percent month-on-month (MoM).
The core inflation, or non-food, non-oil part of the headline inflation, continues to be sticky, although it has come down below the 6 percent mark in recent months. Core inflation has remained in the range of 5.5 percent (in June) and 6.1 percent (in March) in the last four months.
Earlier, a Reuters poll of economists had predicted that the MPC will hold its key interest rate at 6.50 percent through end-March 2024. A majority said rates will stay there through the first quarter of 2024, followed by 50 basis points worth of cuts by the end of June, around the same time when markets expect the US Federal Reserve to start cutting its rates.
Also, another poll of economists by Reuters found that India's retail inflation likely to have accelerated to 6.40 percent in July on surging food prices, breaching the upper end of the Reserve Bank of India's 2-6 percent tolerance band for the first time in five months.
Food prices, which account for nearly half of the inflation basket, have soared in the last two months largely due to an erratic monsoon throughout the country, pushing tomato prices at wholesale markets up more than 1,400 percent in the past three months.
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