With the job of aligning retail inflation with the 4 per cent target not yet finished and transmission of the earlier rate hikes still underway, the RBI’s Monetary Policy Committee (MPC) stood pat on the repo rate on Thursday.

However, the decision to keep the policy repo rate unchanged (at 6.50 per cent), which was widely expected, was not unanimous at the last MPC meeting of the current financial year (FY24).

Varma voted for change

While five members voted for the resolution to maintain status quo on the repo rate, one member (Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad) voted for a reduction of 25 basis points (bps) to 6.25 per cent.

This is the first time in the six MPC meetings of FY24 that the vote on the resolution to hold the repo rate was not unanimous.

Five out of six members voted for the resolution “to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.” Varma voted for a change in stance to neutral.

With retail inflation forecast to reach the MPC’s 4 per cent target only by second quarter (Q2: July-September) of FY25, the members could weigh a shallow rate cut at that point of time. This will be preceded by a change in stance to neutral, say market experts.

Retail (Consumer Price Index/CPI-based) inflation had hit a four-month high of 5.69 per cent in December 2023 due to increase in food prices against 5.55 per cent in November.

Inflation: Job not yet finished

RBI Governor Shaktikanta Das said: “CPI inflation is moderating with intermittent interruptions and spikes. We have to remain vigilant about the incoming data and the outlook. Our endeavor to achieve 4 per cent inflation on a durable basis has to continue.”

He observed that over the last two years, monetary policy has prioritised inflation over growth, undertaking calibrated increase in policy repo rate by 250 basis points and withdrawal of stimulus measures.

“Monetary policy was supported by pro-active supply-side measures by the government. That said, the job is not yet finished, and we need to be vigilant about new supply shocks that may undo the progress made so far,” Das said.

The Governor cautioned that recurring food price shocks could interrupt the ongoing disinflation process, with risks that it could lead to de-anchoring of inflation expectations and generalisation of price pressures.

Adding to these are the renewed flash points on the geopolitical front, including supply chain disruptions. Importantly, the CPI inflation target of 4 per cent is yet to be reached.

Last mile of disinflation challenging

“Monetary policy, in the midst of these lingering uncertainties, has to remain vigilant to ensure that we successfully navigate the last mile of disinflation.

“Stable and low inflation at 4 per cent will provide the necessary bedrock for sustainable economic growth,” Das said, adding that the last mile of disinflation is challenging.

The Governor emphasised that MPC will carefully monitor any signs of generalisation of food price pressures to non-food prices which can fritter away the gains in the easing of core inflation. 

As per the MPC’s assessment, the current setting of monetary policy is moving in the right direction with growth holding firm and inflation trending down to the target.

“Therefore, much has been achieved, but we must remain vigilant. Policy making during uncertain times has to be based on a continuous assessment of the incoming data and its implications for the evolving outlook,” Das said.

Little room for immediate policy pivot

Abheek Barua, Chief Economist, HDFC Bank, opined that the RBI left little room for any imminent policy pivot. Therefore, rate cuts are unlikely to happen before the August 2024 policy.

Referring to the MPC’s ‘no change’ decision,  Crisil’s economic research team led by Chief Economist Dharmakirti Joshi, in a report, said the entire fiscal 2024 now has seen no movement on the policy rate and no alteration in the stance. Yet, interest rates in the market have risen.

“This fiscal, the central bank leaned on liquidity management to improve the transmission of its rate hikes to lending rates. The MPC believes this is the way forward for the next few months as well.

“We believe more clarity on the path of disinflation – shaped by food prices and the trend in crude oil prices given the tensions around the Red Sea — could push this decision at least to June 2024, if not later,” per the report.


Repo rate left unchanged at the 6th consecutive MPC meeting

Withdrawal of accommodation stance continues

Domestic economic activity holding up well 

Large and repetitive food price shocks interrupting pace of disinflation

Cumulative 250 bps repo rate increases still working its way through the economy

Monetary policy must continue to be actively disinflationary