<p>It was expected that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would keep the policy repo rate and maintain its stance of withdrawal of accommodation at its February meeting. The policy rate remains at 6.5%. The MPC intends to align the consumer price index-based inflation rate with the legally mandated target of 4% over the coming months and that is the reason for sticking to the status quo. The inflation rate has been above the RBI’s target for a long period now. It declined to 4.9% in October 2023, but spurted to 5.7% in December. It was comforting that core inflation, which excludes food and fuel prices, came down to 3.8% in December, but the volatility in food prices has kept the headline rate above target. That is why Governor Shaktikanta Das said “the job is not yet finished.” He has also said, in his policy statement, that the RBI’s policy must “continue to be actively disinflationary.’’ </p>.<p>The MPC expects the average headline inflation rate for the financial year to be 5.4%, which is much higher than its comfort level. It expects that it will moderate to 4.5% in 2024-25. The MPC’s projections can be affected by the behaviour of food prices and external factors. Food output can be impacted by adverse weather conditions and irrigation problems caused by lower water levels in the reservoirs, though Rabi sowing has seen improvement and vegetable prices have shown some moderation. Geopolitical issues likes the West Asia conflict and the attacks on shipping in the Red Sea could disrupt supply chains and cause price escalation. Governor Das has sounded a note of caution in this respect also, saying that policy needs to be “vigilant about new supply shocks that may undo the progress made so far.”</p>.<p>The RBI expects the economic momentum to continue in the coming months. Both industrial and services sectors may do well and rural demand and urban consumption are likely to pick up. Investment activity is also likely to ‘’gain steam.” The RBI’s expectation is that the economy will grow at 7% in 2024-25. The strong growth will enable the central bank to concentrate on inflation management. Governor Das has underlined the importance of the ‘’last mile of disinflation’’ that comes after a cumulative rate increase of 250 basis points in the last two years. The central bank thinks that the rate hikes are still working through the system and countering the inflationary pressure. It is also managing liquidity in accordance with its inflation containment strategy. The continuing focus on inflation is vital because loss of control over it can seriously damage growth.</p>
<p>It was expected that the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) would keep the policy repo rate and maintain its stance of withdrawal of accommodation at its February meeting. The policy rate remains at 6.5%. The MPC intends to align the consumer price index-based inflation rate with the legally mandated target of 4% over the coming months and that is the reason for sticking to the status quo. The inflation rate has been above the RBI’s target for a long period now. It declined to 4.9% in October 2023, but spurted to 5.7% in December. It was comforting that core inflation, which excludes food and fuel prices, came down to 3.8% in December, but the volatility in food prices has kept the headline rate above target. That is why Governor Shaktikanta Das said “the job is not yet finished.” He has also said, in his policy statement, that the RBI’s policy must “continue to be actively disinflationary.’’ </p>.<p>The MPC expects the average headline inflation rate for the financial year to be 5.4%, which is much higher than its comfort level. It expects that it will moderate to 4.5% in 2024-25. The MPC’s projections can be affected by the behaviour of food prices and external factors. Food output can be impacted by adverse weather conditions and irrigation problems caused by lower water levels in the reservoirs, though Rabi sowing has seen improvement and vegetable prices have shown some moderation. Geopolitical issues likes the West Asia conflict and the attacks on shipping in the Red Sea could disrupt supply chains and cause price escalation. Governor Das has sounded a note of caution in this respect also, saying that policy needs to be “vigilant about new supply shocks that may undo the progress made so far.”</p>.<p>The RBI expects the economic momentum to continue in the coming months. Both industrial and services sectors may do well and rural demand and urban consumption are likely to pick up. Investment activity is also likely to ‘’gain steam.” The RBI’s expectation is that the economy will grow at 7% in 2024-25. The strong growth will enable the central bank to concentrate on inflation management. Governor Das has underlined the importance of the ‘’last mile of disinflation’’ that comes after a cumulative rate increase of 250 basis points in the last two years. The central bank thinks that the rate hikes are still working through the system and countering the inflationary pressure. It is also managing liquidity in accordance with its inflation containment strategy. The continuing focus on inflation is vital because loss of control over it can seriously damage growth.</p>