The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) has expressed increasing confidence that inflation will converge with the central bank’s target of 4% by next year, despite current fluctuations. The minutes of the MPC’s latest meeting, held on October 9, 2024, highlight cautious optimism, as the committee members chose to maintain the repo rate at 6.5% and shift the policy stance from “withdrawal of accommodation” to “neutral.”
Key Concerns on Inflation and Growth
According to the meeting minutes, the MPC remains focused on controlling inflation, particularly in light of unpredictable factors like global commodity prices, geopolitical tensions, and erratic weather patterns. The shift to a neutral stance indicates that the RBI prioritises inflation control over economic stimulus through rate cuts. Governor Shaktikanta Das emphasised the importance of ensuring inflation doesn’t spiral out of control, noting, “We cannot risk another bout of inflation at this critical stage in our economic recovery.”
The central bank’s inflation target is set at 4%, with a tolerance range of 2% on either side. In September 2024, retail inflation surged to 5.49%, primarily driven by rising food prices. Despite this uptick, the RBI is confident that inflation will gradually align with its target by 2025.
Rate Cut Hopes Dimmed
In contrast to market expectations of a rate cut by the end of 2024, the MPC stressed that any reduction in the policy rate would be premature. During a separate discussion, Governor Das reiterated this point, stating that hasty rate cuts could jeopardize the progress in controlling inflation. This cautious approach has led many economists to push back their rate cut forecasts to early 2025.
MPC member Saugata Bhattacharya noted that household inflation expectations have been stabilizing, which strengthens confidence that inflation will continue to decline. “The battle against inflation is far from over, but we are increasingly confident of achieving our goal of bringing CPI inflation closer to the target,” Bhattacharya added.
Differing Views on Economic Growth
While inflation control remains a key focus, the MPC members were divided on the issue of economic growth. The central bank projects India’s GDP growth for FY25 at 7.2%, but some members raised concerns about slowing industrial demand both domestically and globally. External member Nagesh Kumar suggested that a rate cut might help boost private investment and support demand in the industrial sector, which is currently facing challenges.
On the other hand, Ram Singh, another external member, expressed optimism about growth prospects but warned that food inflation remains a significant risk. “While food inflation is likely to moderate in the coming months due to strong agricultural output, unpredictable weather conditions could still pose a threat,” Singh remarked.
Patience Urged on Monetary Policy
RBI Deputy Governor Michael Patra stressed the importance of maintaining a cautious approach. He warned against lowering interest rates too quickly, noting that it could undo the progress made in bringing down inflation. “The persistence of inflationary pressures could diminish with a less restrictive stance, but reducing restraint too quickly may negate our progress,” Patra said.
Despite the challenges, the MPC remains optimistic about achieving the inflation target in the medium term. However, economists like Madan Sabnavis, Chief Economist at Bank of Baroda, caution that the exact timing of a rate cut remains uncertain. “Given the recent inflation figures, it seems unlikely that a rate cut will happen before February,” Sabnavis observed.
Conclusion: The Road Ahead for Inflation Control
The RBI’s MPC has adopted a cautious yet confident approach to inflation management. With inflationary pressures expected to ease in the coming months, the central bank is holding firm on interest rates to prevent any potential setbacks. The shift to a neutral stance reflects the RBI’s delicate balancing act between promoting economic growth and maintaining inflation control.
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Source:
- Reserve Bank of India (RBI) Monetary Policy Committee Meeting Minutes, October 2024
