The Reserve Bank of India (RBI), on April 5, left the key policy rate unchanged at 6.5 per cent in its monetary policy review for the seventh consecutive time. The RBI’s Monetary Policy Committee (MPC) decision to leave the policy rate unchanged was very much on expected lines. The RBI highlighted that healthy economic growth gives room to the Central Bank to continue its focus on containing inflation to the 4 per cent target on a durable basis. RBI’s current neutral policy stance appears designed to mitigate risks without unduly unsettling the debt and equity markets. This strategy highlights the RBI’s priority to balance growth with inflation control, acknowledging the significant weight of volatile food components in India’s retail inflation basket and the potential impact of global oil price fluctuations.
The Central bank last changed rates in February 2023, when the repo rate was hiked to 6.5 per cent. The RBI had in fact 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. Repo rate is the interest rate at which the RBI gives short-term loans to banks to enable them to meet their liquidity requirements. Inflation has now come down to around 5 per cent and is well below the RBI’s upper tolerance limit of 6 per cent, but the Central bank is determined to bring it down to its medium-term target of 4 per cent, which it considers ideal for stable growth in the economy.
While the core inflation, including services inflation, has been moderating in the last few months, the main concern of the RBI is the persistent high food inflation and the adverse impact of that on household inflationary expectations. RBI has stated several times that although inflation has been moderating, unless it falls to 4 per cent on a durable basis, the Central bank will not think of changing its policy focus. With India continuing to clock the fastest GDP growth among the major economies, the RBI has ample headroom to keep interest rates on hold in the near term without hurting growth.
The Indian economy had thrown up a surprise 8.6 per cent growth in the October-December quarter driven by government expenditure on big-ticket infrastructure projects and strong domestic demand. The macroeconomic fundamentals of the economy have turned stronger with the fiscal deficit well in control following robust tax collections. The lower fiscal deficit will help control inflation as well as leave more money in the banking system for corporates to take loans for investments as the government needs to borrow less. Economic indicators for the January-March quarter have also been encouraging with exports growing at a decent pace. This has led to a decline in the current account deficit reflecting a stronger external balance of payments position.
