Opinion Express View on RBI interest rates: Holding the line

In line with expectations, the Monetary Policy Committee of the Reserve Bank of India voted in its February meeting to keep interest rates unchanged. The repo rate stands at 6.5 per cent. The committee also decided to remain focused on the withdrawal of accommodation. In his policy statement, RBI Governor Shaktikanta Das noted that “the job is not yet finished” and that policy must “continue to be actively disinflationary to align inflation to the target of 4 per cent on a durable basis”.

In December, retail inflation, as measured by the consumer price index, had edged upwards to 5.69 per cent, up from 5.55 per cent the month before. However, this rise in inflation, driven by rising food prices, was not unexpected. On the other hand, core inflation, which excludes the more volatile food and fuel components, had dipped lower to 3.8 per cent in December. The central bank now expects inflation to trend lower to 5 per cent in the fourth quarter (January-March). For the next financial year (2024-25), assuming a normal monsoon, it expects inflation to moderate further to 4.5 per cent. However, the outlook is uncertain. As the RBI also notes, adverse weather events which could impact food prices, and geopolitical tensions and conflicts which could lead to supply chain disruptions, could heavily influence the trajectory of inflation. Governor Das also sounded a note of caution, saying that policy needs to be “vigilant about new supply shocks that may undo the progress made so far.” On growth, the RBI Governor sounds optimistic, expecting the economic momentum to continue in the coming financial year (2024-25) as well. Das points to industrial activity “gaining steam”, while the services sector “is expected to remain resilient”. He sees rural demand continuing to gather pace, even as urban consumption remains strong, with investment activity also “gaining steam” on the back of a sustained push in government spending. Based on these trends, the central bank expects the Indian economy to grow at 7 per cent in 2024-25.

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The monetary policy committee’s decisions were, however, not unanimous. MPC member Jayanth Varma disagreed with other members of the committee on both interest rates and the policy stance. Varma, in fact, voted for reducing the repo rate by 25 basis points and for changing the policy stance from remaining focused on the withdrawal of accommodation to neutral. In the past as well, Varma has argued that monetary policy should be less restrictive. However, hostilities in the Red Sea and uncertainty regarding the trajectory of food prices are likely to have an outsized influence in the immediate term. If inflation evolves along expected lines over the coming months, it could open up space for the committee to change its policy stance and cut rates.