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The Reserve Bank of India’s Monetary Policy Committee (MPC) on Friday (December 6, 2024) decided to keep the policy repo rate unchanged at 6.50% for the 11th consecutive time.
The last time the MPC had increased rates to 6.5% was in February 2023.
The MPC also decided unanimously to continue with the neutral stance and to remain unambiguously focused on a durable alignment to the 4% target of inflation while supporting growth.
The MPC took note of the recent slowdown in growth momentum which translates into a downward revision of the growth forecast of this year. The second half of this year and next year growth outlook remains resilient but warrants monitoring.
Governor Shaktikanta Das announced the central bank’s decision on policy rates in the RBI’s concluding day Monetary Policy Committee (MPC) meeting on Friday. “India’s economy has been growing healthily in the last 3 years. It is always the effort of the RBI and the MPC to follow the mandate in letter and spirit,” he said while making the announcement.
Monetary policy is important because it affects the life of people, each and every segment of the economy, howsoever small or big, from vegetable vendors to middle class to corporates, farmers, and industry and business and it has wide ranging implications
“Our effort is to follow the flexible inflation targeting framework as provided in the RBI Act and the RBI’s mandate is to maintain price stability while supporting growth. Price stability is important for every segment of the economy. At the same time, growth is also very important.”
Stating that the last mile of disinflation is turning out to be prolonged and arduous for both emerging and developed economies, he said in India, notwithstanding the recent aberration in growth and inflation trajectories, the economy continues its journey on a sustained and balanced path towards progress.
Food inflation pressures to linger
Food inflation pressures are likely to linger in Q3 of this financial year and start easing from January to March, the MPC said in its statement, with high inflation reducing the disposable income of consumers and denting private consumption which negatively impacts the real GDP growth.
“The MPC believes that only with durable price stability can strong foundations be secured for high growth. The MPC remains committed to restoring the inflation-growth balance in the overall interest of the economy,” it added.
In its assessment of growth and inflation, the MPC noted that the global economy has shown unusual resilience in 2024 despite several headwinds. Underlining that inflation is gradually moving towards the target from its multi-decadal high, which is in turn prompting several central banks to undertake a policy pivot, the MPC said that going forward, “the outlook is clouded by rising protectionism which have also the potential to undermine growth.”
Growth in GDP lower than expected
The MPC said that with regards to the domestic growth situation, growth in real GDP in the second quarter at 5.4% turned out to be much lower than anticipated. :This decline in growth was driven mainly by a substantial deceleration in industrial growth from 7.4% in Q1 to 2.1% in Q2 due to subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand.”
“The weaknesses in the manufacturing sector, however, was not broadbased but was limited to specific sectors such as petroleum, iron and steel, and cement. Going forward, high-frequency indicators that the slowdown in economic activity bottomed out in Q2, and it has since recovered, aided by strong festive demand and pick up in rural activities.”
Headline inflation to remain elevated
Inflation increased sharply in September and October, led by an unanticipated increase in food prices the MPC noted. Core inflation, though at subdued levels, also registered a pick-up in October.
“In the near term, despite some softening, lingering food price pressures are likely to keep headline inflation elevated in the third quarter — October to December.”
With early indications suggesting good soil moisture and reservoir levels, conducive for Rabi sowing, and the expectation of a record Kharif crop, there should be some relief on prices of rice and tur dal in particular, the MPC said. Vegetable prices are also expected to see a seasonal winter correction.
“On the upside, the evolving trajectory of domestic edible oil prices following the hike in import duty and rice in their global prices, need to be monitored closely.”
Manufacturing and services firms surveyed by the Reserve Bank point to hardening input costs and hikes in selling prices in Q4 of 2024-25, that is January to March, it added.
“Taking all these factors into consideration, the Consumer Price Inflation for 2024-25 is projected at 4.8%, with Q3 at 5.7% and Q4 at 4.5%. Going into 2025-26, Q1 inflation is projected at 4.6% and Q2 at 4%. The risks are evenly balanced.”
Published – December 06, 2024 10:17 am IST
