The key policy repo rate remained unchanged at 6.5 per cent as the RBI for a ninth consecutive meeting continued to maintain a balance between accelerating economic growth and keeping inflation under control. The RBI Monetary Policy Committee (MPC) has decided by a 4:2 majority to keep the repo rate unchanged as inflation has risen above 5 per cent and is still above the targeted level of 4 per cent. Inflation after having eased to 4.8 per cent in April and May has risen to 5.1 per cent in June on the back of high food prices. So the MPC decided to continue with the disinflationary stance.
The RBI has decided to stick to the “withdrawal of accommodation” policy stance. Monetary policy is considered to be “accommodative” when it aims to make more money available in the banking system to spur economic growth and create more jobs. The RBI had last changed rates in February 2023, when the repo rate was hiked to 6.5 per cent. The RBI raised rates by 2.5 per cent between May 2022 and February 2023 after which they have been kept on hold to support economic growth despite inflationary pressures in the past.
The repo rate is the interest rate at which the RBI gives short-term loans to banks to enable them to meet their liquidity requirements. This in turn has an impact on the cost of loans that banks extend to corporates and consumers. A cut in interest rates results in more investment and consumption expenditure which spurs economic growth. However, the increased expenditure also pushes up the inflation rate as the aggregate demand for goods and services goes up. So RBI has put off an interest rate cut until inflation comes down to its targeted level.
The RBI’s Monetary Policy Committee decision is primarily driven by risks to the inflationary outlook. Although the overall growth rate is expected to remain healthy, the MPC chose to stay cautious about inflation. Despite an above-normal monsoon so far, the overall risk of food inflation remains high due to highly uneven rainfall in the first half of the monsoon season. Even though the Southern states have received good rainfall, key agrarian regions, particularly in North and East India, continue to face double-digit deficits in rainfall.
Apart from food inflation risks, the recent hikes in telecom tariffs by major mobile service providers, ranging from 10-25 per cent, will put upside pressures on core inflation. Telecommunication services account for about 2.1 per cent of the overall Consumer Price Index (CPI) basket and 4.4 per cent of core inflation. The recent sales tax increases on fuel prices in a few states will also marginally impact inflation prints. Moreover, the upward revision of prices of commercial cooking gas by major state-owned retailers can have second-order effects on the CPI.
