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Introduction
- RBI Policy: The Reserve Bank of India is anticipated to keep the repo rate steady at 6.50 percent during the upcoming monetary policy committee meeting. RBI Governor Shaktikanta Das is likely to uphold the approach of withdrawing accommodation. A recent report by the State Bank of India ahead of the policy announcement suggests that the August policy might witness a pause in rate changes due to easing inflation trends. The report also points to the possibility of maintaining the current stance rather than shifting from accommodation withdrawal to a neutral stance.
- According to a Reuters poll involving economists the RBI is projected to maintain the repo rate at 6.50 percent until March 2024, with the first rate cut expected in the second quarter of 2024. A majority of the polled experts believe that the repo rate will remain constant through the first quarter of 2024, followed by a potential 50 basis points reduction by the middle of 2024.
The Previous RBI Policy and Inflation Trends
In the previous monetary policy meetings, RBI Governor Shaktikanta Das chose to keep the repo rates unchanged at 6.50 percent. All the committee members agreed with this decision. Before that, the rates remained unaltered in the April meeting as well. This followed a cumulative increase of 250 basis points since May 2022 aimed at managing inflation. In June, the country’s retail inflation reached 4.81 percent from May 4.31 percent driven by higher vegetable prices and the diminishing effect of the favorable base effect.
Governor Shaktikanta Das, during the recent policy announcement, reiterated his concerns about inflation. Despite the rise in Junes inflation figures he pointed out that looking at the broader trend over the past four months, inflation largely remained below the 6 percent upper limit. In May, CPI inflation was at 4.25 percent down from April’s 4.5 percent and March 5.66 percent.
Expert Insights and MPC’s Caution
- Economists anticipated that even with the decreasing inflation the Monetary Policy Committee might adopt a cautious stance and maintain rates during the August policy review, aligning with the actual outcome. In a previous policy, the committee had clearly outlined its goal of gradually bringing inflation closer to the 4 percent medium term target although achieving this target might take time. Additionally, potential risks to inflation including those from food prices due to factors like El Niño and erratic monsoon patterns, continue to influence the inflation scenario.
- June’s data reveals that food prices have once again played a role in influencing inflation. The Consumer Food Price Index of the CPI surged by 2.5 percent month on month, contributing to the overall inflation increase. Core inflation which excludes food and oil prices remains somewhat stable. Over the last four months the core inflation went from 5.5 percent in June to 6.1 percent in March showing some changes in between.
Economists’ Projections and Inflation Concerns
A Reuters poll involving economists indicated that the MPC is likely to maintain the key interest rate at 6.50 percent until the end of March 2024. The consensus suggests that the rates will persist at this level throughout the first quarter of 2024, followed by a potential 50 basis points reduction by mid 2024. This projection coincides with the timing when the US Federal Reserve is also expected to begin reducing its rates.
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In another survey by Reuters, economists predicted that India’s retail inflation might have risen to 6.40 percent in July due to surging food prices. This would breach the upper limit of the RBI’s 2-6 percent tolerance band for the first time in five months. The soaring food prices which contribute significantly to inflation can be attributed to unpredictable monsoon patterns across the country. Just think about tomato prices they have gone way up jumping more than 14 times in just three months. This happened because of the unusual weather patterns we have been having.
RBI POLICY:- Keylights from MPC Meeting
Economic Growth
- The RBI predicts that India’s economy will grow by about 6.5% in the year FY24 which means from April 2023 to March 2024. This growth rate is unchanged from their previous prediction, indicating that the economy is getting stronger and more steady.
- They believe that the economy will keep getting bigger around 6.5% from July to September 2023. After that they believe it might slow down a little to around 6.0% from October to December 2023.
- For the start of 2024 from January to March, they believe the economy will grow by 5.7%. Then for the following three months, which is from April to June, they expect an even better growth rate of 6%.
- The RBI boss Mr. Das, mentioned that the overall economic activity in India is looking good. Industries are doing well which is shown by numbers like industrial production growth core data and the PMI.
- He also said that other countries are facing challenges like high prices debts financial problems and even bad weather. These things can slow down economies. But India seems to be doing better in facing these problems compared to many other countries.
What’s the Plan?
- The RBI decided to keep things pretty much the same when it comes to policies. They want to slowly reduce the help they are giving to the economy which is called withdrawal of accommodation.
Inflation
- Prices of things we buy like food and stuff have been going up. The RBI is keeping an eye on this and wants to control it. They are working to bring down inflation higher prices to a certain level.
- They now think that prices will go up by about 5.4% in the entire year FY24. This is a bit higher than what they thought before because food prices have been going up.
- In the coming months they believe that prices will rise by about 6.2% from July to September 2023. After that around October to December 2023, prices might go up by roughly 5.7%. And from January to March 2024, the expectation is for prices to increase by about 5.2%.
- From April to June 2024, they predict prices to go up by 5.2% as well.
Other Important Points
- The RBI talked about something called CAD which is about how much money comes into India compared to how much goes out. They think this will stay manageable.
- They also mentioned home loans. They want banks to be clear about how they decide the interest rates for these loans. They are also thinking about letting people switch from a floating interest rate to a fixed one.
Conclusion
As the RBI prepares to announce its monetary policy decision experts and economists anticipate a continuation of the repo rate at 6.50 percent. Concerns over inflation trends especially in food prices remain a significant factor influencing the central bank’s decisions. Despite inflation fluctuations the RBI’s cautious approach and commitment to gradual adjustment toward the medium term inflation target are evident. As the economy navigates uncertainties the RBI’s steady stance and expert projections provide valuable insights into the monetary landscape.
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