Monetary policy has to remain in a risk minimisation mode, guiding inflation towards the 4 per cent target while sustaining the momentum of growth, according to an article in RBI’s latest monthly bulletin.
“Even as inflation is on the ebb with broadbased softening of core inflation, the repetitive incidence of short amplitude food price pressures deters a swifter fall in headline inflation towards the target of 4 per cent,” said RBI officials, including MD Patra, Deputy Governor, in the article “State of the Economy”.
With RBI projecting CPI (consumer price index) inflation to align with the 4 per cent target in the second quarter (July-September) of FY25, this may give it the wiggle room to cut the policy repo rate in the second half of the next fiscal, say experts.
Soumyajit Niyogi, Director, India Ratings & Research, expects RBI to cut repo rate by 25-50 basis points in the second half of FY25.
After increasing the policy repo rate by 250 basis points (bps) between May 2022 and February 2023, the RBI has been on hold in a bid to align inflation with the target, contain second round effects and keep inflation expectations anchored.
The repo rate (the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches) is currently at 6.50 per cent.
Headline inflation, as measured by year-on-year changes in the all-India consumer price index (CPI), remained unchanged at 5.1 per cent in February 2024 as a positive momentum of around 15 bps was fully offset by favourable base effects.
The officials noted that CPI readings for January and February 2024 show that the winter easing of vegetable prices turned out to be shallow and short-lived.
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