The June meeting of the monetary policy committee was held against the backdrop of an improving macroeconomic environment — inflation has fallen below expectations, and growth has fared better than most optimistic projections. In this environment, as was expected, the MPC has voted unanimously to keep interest rates unchanged as it assesses the impact of past monetary policy action. The benchmark repo rate stands at 6.5 per cent. The tone of the policy was balanced. The committee emphasised the need to remain “vigilant” on the growth-inflation outlook considering the uncertainty stemming from the deceleration in global economic activity, tight financial conditions, elevated inflation, and continuing geopolitical tensions.
In recent months, inflation has surprised on the downside. Retail inflation, as measured by the consumer price index, fell to 4.7 per cent in April, down from 5.66 per cent March, in part, due to the base effect. Core inflation, which has tended to be sticky, has also softened. Factoring in these readings, the RBI has now lowered its inflation projections for the first quarter to 4.6 per cent, down from 5.1 per cent earlier. However, inflation is expected to edge upwards thereafter to 5.2 per cent in the second quarter, 5.4 per cent in the third quarter, and 5.2 per cent in the fourth quarter, as the base effect fades. For the full year, the central bank now expects inflation at 5.1 per cent, only marginally lower than its earlier forecast of 5.2 per cent. While these projections point towards a real interest rate of 1.3 per cent, they also imply that inflation is likely to remain above the 4 per cent target for the foreseeable future. There remains considerable uncertainty over how the monsoon will play out — its temporal and spatial distribution could have a bearing on output and prices. In the run-up to this meeting, there was some expectation of the MPC changing its stance. However, the committee has voted (5-1) to keep its stance unchanged, remaining focused on the “withdrawal of accommodation”. It is possible that once there is greater clarity on the trajectory of inflation in the coming months and over the impact of El Niño, the policy stance will be suitably altered.
On growth, too, there is reason for optimism. In the last quarter (January-March) of 2022-23, the Indian economy grew at 6.1 per cent, surpassing most expectations. This has prompted many analysts to raise their forecasts for growth in 2023-24. However, despite that, most of these estimates remain below the central bank’s assessment, which still pegs growth at 6.5 per cent. In fact, the RBI now expects the economy to grow at 7.25 per cent in the first half of the year, slowing down thereafter to 5.85 per cent over the second half. How this growth-inflation dynamic evolves with respect to the central bank’s expectation will determine the course of monetary policy.
