The Reserve Bank of India’s Monetary Policy Committee (MPC) has unanimously and wisely decided to apply a temporary pause to its inflation-battling monetary tightening by keeping the repo rate unchanged. RBI Governor Shaktikanta Das was emphatic in stressing that the decision to pause was “for this meeting only”, underlining the commitment to ensuring that retail inflation is progressively aligned to the mandated target of 4%. Clearly, developments in the global financial system, particularly the banking sector turmoil and the volatility and uncertainty they have triggered, have weighed heavily on policymakers’ decision to wait and watch. Notwithstanding his assertions that India’s ‘banking and non-banking financial service sectors remain healthy and economic activity remains resilient’, it is the spectre of rising credit costs posing risks to both consumption demand and private investment that was a key factor in the World Bank’s calculus earlier this week, when it cut India’s 2023-24 growth forecast to 6.3%. With the global economy still facing headwinds including from unabated geopolitical tensions, which the World Bank warned could result in a recession were more shocks to occur, the RBI’s policymakers have judiciously chosen to subordinate their concerns over inflation, for now, so as to ensure the growth momentum is not undermined.
Still, monetary authorities have only a small window in which to see if their prognostication of a moderation in inflation is indeed starting to pan out. With Mr. Das acknowledging that core inflation remains elevated across a range of goods and services and unyielding, the MPC faces a challenge in its mandate of achieving durable disinflation. As the RBI’s latest Monetary Policy Report notes, upside risks to the inflation outlook emanate from factors including higher global crude and commodity prices and extreme weather conditions and deficient monsoon rains. Already, as Mr. Das acknowledged, the sudden recent announcement of an output cut by OPEC+ producers had resulted in a jump in crude prices, which could well upset the RBI’s assumption of crude averaging $85 a barrel (for the Indian basket) this year. Similarly, the outlook for food prices too is beset with uncertainty given the unseasonal rains in parts of the country combined with the likelihood of an El Niño, which could raise summer temperatures and depress monsoon rainfall. Additionally, the RBI sees milk prices staying firm over the coming months amid fodder cost pressures. Policymakers must remember, as the RBI chief so pithily said, price stability still remains “the best guarantee for sustainable growth”.
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