RBI Monetary Policy Live: RBI leaves inflation projection for FY25 unchanged at 4.5% as 'elephant' out for a walk

India’s central bank today left its inflation forecast for this fiscal year unchanged at 4.5% assuming normal monsoon, even as the country braces for a scorching summer amid a spike in crude oil prices and persisting worries about supply chain due to the Red Sea crisis. However, RBI Governor and MPC Chair Shaktikanta Das two years ago elephant in the room was inflation, which has now has gone out for a walk to the forest.

The Reserve Bank of India's (RBI) Monetary Policy Committee with a five-to-one majority decided to keep the repo rate- key lending rate- unchanged at 6.5% for the seventh time in a row. The rate-setting panel also left the policy stance unchanged with focus on withdrawal of accommodation. "Inflation (for global economies) is moving closer to targets but the last mile is turning out to be challenging," said while announcing the policy decisions. Robust growth prospects provide policy space to remain focused on bringing inflation to 4% target, he said. The RBI has an inflation target of 4% (with a leeway of 2 percentage points on either side). The country's retail inflation was closest to the 4%-mark last in January 2021 at 4.06%.

In February, India's retail inflation remained largely unchanged at 5.09% compared with 5.10% owing to higher food prices that sparked economists to believe that the policy rate-setting panel will leave key rates unchanged in April. Food inflation rate in February quickened to 8.7% from 8.3% in the previous month, driven by a rise in vegetable inflation to a seven-month high of 30.2%, compared to 27.1% earlier. Experts had also indicated that a higher food inflation number could keep overall inflation from declining significantly. Prices of key vegetables such as onion, tomato and potato have risen and a Crisil analysis recently showed the cost of a veg thali in India rose 7% in March. Despite volatile food inflation in February, core inflation, excluding food and fuel, has shown a downward trend. However, concerns persist regarding the impact of weather variations on inflation and economic stability. Core inflation has declined steadily over the past 9 months to its lowest level in the series, Das said today, adding early indication of normal monsoon augurs well for kharif season. India is preparing for intense heat from April to June, especially in the central and western peninsular regions. The anticipated heatwave could affect the agricultural economy, resulting in inflationary pressures due to rising commodity prices.

Meanwhile, Brent and WTI futures have reached their highest levels in over five months, driven by concerns about Ukraine's recent attacks on Russian refineries and the potential expansion of conflict in the Middle East, which could disrupt oil supplies. The recent uptick in crude oil prices need to be closely monitored, Das said. The Indian government has also warned that the country's inflation and economic growth face threats due to the surge in oil prices triggered by disruptions in the Red Sea. This underscores the importance of diversifying trade routes to mitigate such risks. While the RBI governor has vowed to keep ‘Arjuna’s eye’ on inflation and bring it down to mandated 4% level, the inflation rate of India has hovered above the target for months. Das had expanded the scope of his frequently cited 'Arjuna' analogy to convey that Mint Road takes into account various factors beyond just inflation when shaping policies, while flagging that headline inflation remains vulnerable to recurring and overlapping shocks due to overseas and domestic factors. Shaktikanta Das has repeatedly played down the likelihood of a rate reduction unless inflation stabilises around the RBI's 4% target. Economists now believe the central bank would prefer to monitor the monsoon's progress before considering any shift towards a softer monetary policy. India’s policymakers have been working to keep inflation in check through a mixture of monetary and fiscal interventions, be it through rates or export curbs.

-Economic Times 05th Apr, 2024.

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