HOLDING THE RATE

Greater clarity over monsoon and trajectory of food inflation could create space for RBI to cut rates

IN ITS FIRST meeting of this financial year, the Monetary Policy Committee of the Reserve Bank of India voted to maintain the status quo. The repo rate remains at 6.5 per cent. Alongside, the committee retained its policy stance, deciding to remain focused on the withdrawal of accommodation. This was expected, as even though core inflation had fallen to 3.4 per cent in February, food prices were elevated. Moreover, the outlook for food inflation remains uncertain. RBI Governor Shaktikanta Das said that the committee needs to be watchful for the upside risks that “might derail the path of disinflation” and that policy must remain “actively disinflationary to ensure anchoring of inflation expectations”.

Recent data has shown that food inflation has continued to inch upwards. The consumer food price index edged up to 8.66 per cent in February, up from 8.3 per cent in January. Inflation remained elevated in cereals, eggs, vegetables, pulses and spices. However, there are expectations of rains being better this year, which augurs well for food inflation. The US National Oceanic and Atmospheric Administration expects La Niña conditions to develop, which bode well for the southwest monsoon, according to a note by Crisil. More clarity will emerge in the coming months. As of now, the RBI expects inflation to average slightly above its target this year. On the growth front, the central bank has retained its estimate of GDP growth at 7 per cent for 2024- 25. This healthy growth momentum has provided the committee the space to focus on price stability. While uncertainty continues over both private consumption and investment, the central bank appears to be optimistic. It notes that “private consumption should gain steam with further pick- up in rural activity and steady urban demand”, and that “prospects of fixed investment remain bright… signs of upturn in the private capex cycle”.

The decision of the committee was, however, not unanimous. MPC member Jayanth Varma voted to reduce the repo rate by 25 basis points, and to change the policy stance to neutral. Varma has in the past argued that the real interest rate may now be restrictive. In the April policy, the RBI has projected inflation at 4.5 per cent in 2024- 25. Considering that the repo rate is at 6.5 per cent, this implies a real rate of 2 per cent. In comparison, Varma has argued in the past that a real rate of 1- 1.5 per cent would suffice to guide inflation to the RBI’S target of 4 per cent, implying the space to cut rates. The US Federal Reserve is also expected to cut rates in the coming months. As more clarity and certainty emerges over the monsoon and the trajectory of food prices in the country, it is possible that the space to cut interest rates will emerge.