The monetary policy committee (MPC) on Friday unanimously decided to maintain status quo on the repo rate, a decision that was widely expected due to risks from food inflation, even as the central bank bumped up its FY24 real GDP projection to 7 per cent from 6.5 per cent earlier.

This is the fifth consecutive meeting (held between December 6 and 8) in the current financial year that the committee left the repo rate (the interest rate at which RBI provides liquidity to banks and primary dealers to overcome short-term liquidity mismatches) unchanged at 6.50 per cent.

Governor Shaktikanta Das, in his 32nd monetary policy statement, observed that “On the inflation front, the summer of 2022 is behind us. We have made significant progress in bringing down inflation. The steady decline in core inflation indicates that monetary policy is working.”

However, Das cautioned that, moving forward, inflation management cannot be on autopilot. He noted that there is still some distance to cover to achieve the 4 per cent CPI (retail) inflation target, and the policy has to stay the course.

The near-term outlook is masked by risks to food inflation, which might lead to an inflation uptick in November and possibly in December, he said, adding that this needs to be watched for second-round effects, if any.

The MPC, which met from December 6 to 8, 2023, also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns to the (4 per cent) target while supporting growth.

With the RBI projecting CPI inflation to touch 4 per cent in the second quarter of FY25, experts say a rate cut could happen only then.

In the context of CPI headline inflation moderating to 4.9 per cent in October from 7.4 per cent in July, Das underscored that policymakers have to be mindful of the risk of being carried away by a few months of good data or by the fact that CPI inflation has come within the target range.

“They have to be mindful of the risk of overtightening, especially when large structural changes and geopolitical and geoeconomic shifts are taking place.

“On top of this, they have to be watchful of the risks from new shocks that could hit the economy from anywhere, anytime,” he said.

Hawkish policy commentary

Radhika Rao, Executive Director and Senior Economist, DBS Group, observed that the policy commentary was hawkish, underscored by the cautious view on inflation and emphasis on their preparedness to tighten further if warranted.

“The Governor highlighted the risk of overtightening levers. In our view, these comments neither imply that the policy has taken a dovish turn nor a change in stance to neutral is imminent.

“Instead, with a strong growth momentum, the MPC will be mindful of signs of generalisation of food price pressures, which could dilute gains from the recent easing of core inflation,” she said.

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