Saturday, December 9, 2023

RBI Holds Steady on Policy Rate While Expressing Inflation Concerns

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In its October review meeting, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) unanimously opted to maintain the policy repo rate at its current level of 6.5 percent, marking the fourth consecutive instance of maintaining the status quo.

During the deliberations of the policy statement on Friday, RBI Governor Shaktikanta Das conveyed the central bank’s concern and identified high inflation as a significant risk to both macroeconomic stability and sustainable growth. He emphasized the MPC’s commitment to bringing India’s headline inflation down to the 4 percent target level.

Governor Das also highlighted that five out of the six MPC members are in favor of maintaining a focus on the “withdrawal of accommodation” in the monetary policy stance. This approach aims to ensure that inflation progressively aligns with the target while supporting economic growth.

The three-day bi-monthly MPC meeting of the RBI commenced on Wednesday, with keen attention from financial market participants who closely monitored the outcomes and policy stance of the central bank for new insights.

RBI typically conducts six bi-monthly meetings in a financial year to discuss interest rates, money supply, inflation forecasts, and various macroeconomic indicators.

In the three preceding meetings held in April, June, and August, RBI maintained the repo rate at 6.5 percent. The repo rate represents the interest rate at which RBI lends to other banks.

The recent relative decline in inflation, except for the latest surge, and the potential for further reduction may have influenced the central bank’s decision to keep the key interest rate unchanged. While inflation has been a concern for many countries, including advanced economies, India has managed its inflation trajectory relatively well.

Excluding the most recent third consecutive pause, RBI had raised the repo rate by a total of 250 basis points since May 2022 in its efforts to combat inflation. Increasing interest rates is a monetary policy tool typically used to curb demand in the economy, which, in turn, helps lower the inflation rate.

In India, headline inflation increased to 7.8 percent in July due to rising prices of food items like wheat, rice, and vegetables, including tomatoes. Subsequently, it fell to 6.8 percent in August. The inflation data for September is expected to be released in the coming days.

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