Mumbai: The Reserve Bank of India (RBI) on Thursday left its key interest rates unchanged for a third straight meeting but signalled tighter policy if food prices continue to drive inflation higher.
The monetary policy committee, which has three members from the central bank and a similar number of external members, held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision.
It retained the stance on “withdrawal of accommodation” but Governor Shaktikanta Das sounded hawkish when he highlighted that headline inflation needs to subside sustainably below 4 per cent and any surge in the inflation print, if continued for a longer period, may necessitate fresh action.
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 trends, are likely to influence the inflation outcome.
The hawkish stance was also reinforced by the unexpected announcement of reducing the cash in the banking system by raising the incremental cash reserve ratio (I-CRR) to 10 per cent on the incremental NDTL (net demand and time liabilities) over the last three months. This will help in absorbing a large part of the excess liquidity created through the return of the Rs 2,000 notes and the large dividend to the government from RBI.
The I-CRR will be reviewed on September 8th or earlier.
The move is expected to suck out about Rs 1 lakh crore from the banking system, he said, adding that this liquidity tightening measure will not impact credit needs of productive sectors.
“The job on inflation is still not done,” Das said. “Inflationary risks persist amidst volatile international food and energy prices, lingering geopolitical tensions and weather-related uncertainties.”
The RBI raised its inflation forecast for the current financial year ending March 2024 to 5.4 per cent from 5.1 per cent earlier, citing pressures from food prices. In the July-September quarter, it saw inflation at 6.2 per cent, significantly higher than the 5.2 per cent earlier forecast.
“We do look through idiosyncratic shocks but if it shows signs of persistence, we have to act,” he said detailing decision of the MPC meeting here.
The MPC drew confidence from moderation in core prints and expects a seasonal correction in food prices in the fourth quarter of 2023.
This is the third straight meeting where RBI kept interest rates unchanged. Prior to that, it had raised interest rates by 250 basis points (bps) since May 2022 in a bid to cool surging prices.
Radhika Rao, Executive Director and Senior Economist, DBS Group Research said the MPC commentary can be characterised as “a pause with hawkish underpinnings.”.
RBI retained its projection for Indian economic growth at 6.5 per cent for the current 2023-24 fiscal year (April 2023 to March 2024), supported by consumption and capex cycle.
PTI

Press Trust of India