RBI Policy: The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) concluded its crucial meeting today, October 9, 2024. This meeting, which began on October 7, focused on various economic parameters, including interest rates, growth prospects, and inflation levels. Under the leadership of Governor Shaktikanta Das, the MPC has decided to maintain the repo rate at 6.50%, marking the tenth consecutive time this rate has remained unchanged.
Change in Stance Amid Stable Interest Rates
In a notable shift, the MPC has adopted a neutral stance for its October policy meeting, a decision unanimously supported by all members. Governor Das explained that this change reflects a careful balance between current inflation trends and economic growth expectations. The committee has adjusted its earlier forecasts regarding inflation, considering the latest economic data.
Governor’s Insights on Inflation
Governor Das provided insights on the inflation outlook during the meeting. He indicated that core inflation is expected to remain manageable due to prior policy decisions. However, he warned that inflation could rise in September due to base effects. The central bank is committed to bringing the inflation rate down to around 4%, anticipating a softening of food inflation. Despite this, global tensions pose risks to inflation dynamics, with commodity prices potentially leading to increased inflation pressures.
Inflation Forecasts for FY25
The RBI has projected a Consumer Price Index (CPI) inflation rate of 4.5% for the current financial year (FY25). Expectations indicate a decline in inflation starting from the second quarter. The CPI forecast for Q2 FY25 has been revised down from 4.4% to 4.1%. Conversely, the inflation estimate for Q3 FY25 has been adjusted upward from 4.7% to 4.8%, while the Q4 forecast has been revised down from 4.3% to 4.2%. For the first quarter of FY26, the CPI is expected to remain at 4.3%, slightly down from 4.4%.
Adjustments in GDP Growth Projections
In terms of GDP growth, Governor Das highlighted that investment as a share of GDP has reached a record level not seen since FY13. The RBI now estimates GDP growth at 7.2% for FY25. The forecast for the first quarter of FY26 has been increased to 7.3%, up from the previous estimate of 7.2%. However, the growth estimate for Q2 FY25 has been reduced from 7.2% to 7%. On a positive note, the growth estimate for Q4 FY25 has been revised upward from 7.2% to 7.4%, reflecting an increase in government consumption and improvements in capital expenditure.
Why the RBI Adjusts the Repo Rate
The RBI’s decision to alter the repo rate is influenced by rising geopolitical tensions that have led central banks worldwide to increase rates in an effort to control inflation. The RBI utilizes the repo rate as a vital tool to combat inflation. When inflation rises beyond acceptable limits, the RBI adjusts the repo rate to manage liquidity in the economy. A higher repo rate makes loans from the RBI more expensive for banks, leading to higher borrowing costs for customers. Consequently, reduced liquidity in the economy helps curb inflation.
As the RBI continues to navigate the complexities of inflation and economic growth, its policies will play a pivotal role in shaping the financial landscape of India. The outcomes of this MPC meeting underscore the importance of vigilant monitoring of economic indicators and the ongoing commitment to maintaining stability in the financial system. The RBI’s proactive measures will be crucial as the nation moves forward in these challenging times.
