RBI expected to hold policy rate again at next review meeting, reports Crisil

The monetary policy committee of the Reserve Bank of India is expected to again hold the policy rate in the next meeting, as the central bank awaits a clearer picture on the inflation trajectory, said Crisil in a report. RBI's next monetary policy meeting is scheduled for early October.

"Uncertainty on the inflation trajectory has increased with the recent flare-up in food prices. Monsoon and weather disruptions, along with government interventions and global food supply will influence inflation outcome," said the report titled 'RateView - CRISIL's outlook on near-term rates'. A 25 basis point rate cut in early 2024 is a conditional possibility for now, it asserted.

The RBI kept policy rates unchanged in the August meeting while maintaining its stance of 'withdrawal of accommodation'. However, it introduced Incremental Cash Reserve Ratio (I-CRR) as a temporary measure to manage liquidity.

Taking into consideration the latest uptick in the retail inflation figures, Crisil upwardly revises India's inflation outlook for 2023-24 to an average of 5.5 per cent from its earlier estimate of 5.0 per cent.

“With the sharp surge in the July CPI print, and early signs that August would see minimum relief on food prices, the upside risks to our inflation forecast have materialised,” the report said.

Notably, Retail inflation in India has surged to 7.4 per cent in July from 4.9 per cent in June. The latest rise in inflation could partly be attributed to the current spurt in tomato and other vegetable prices across India. The rise in tomato prices is reported across the country, and not just limited to a particular region or geography. In key cities, it rose to as high as Rs 150-200 per kg.

While retail inflation (Consumer Price Index) in India peaked at 7.8 per cent in April 2022, driven by a reduction in food and core inflation. In some advanced countries, inflation had in fact touched a multi-decade high and even breached the 10 per cent mark.

RBI's consistent monetary policy tightening since mid-2022 could be attributed to the substantial decline in inflation numbers in India. India's retail inflation was above RBI's 6 per cent target for three consecutive quarters and had managed to fall back to the RBI's comfort zone only in November 2022.

Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.

Barring the recent pauses, the RBI has raised the repo rate by 250 basis points cumulatively since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.

After the August monetary policy meeting, the Reserve Bank of India too upwardly revised the country's retail inflation projections for 2023-24 at 5.4 per cent, against the 5.1 per cent it projected in its previous monetary policy meeting in June.

A “substantial increase” in headline inflation would occur in the near term, said RBI Governor Shaktikanta Das as part of his remarks after the policy meeting.

He reiterated what he said after the June meeting – “Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent.”

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