Why is RBI still Cautious about Inflation? | Wealthy
Welcome to Wealthy’s official YouTube channel. June’s Monetary Policy Committee meeting kept the reverse repo rate unchanged at 6.50%. However, the fact that consumer price inflation (CPI) has come down to 4.25% in May 2023 suggests that the central bank’s actions in the last 12 months are starting to work. Governor Das’ long-term goal of achieving 4% CPI seems viable. Watch this video to learn more.
Governor Das warns against complacency
The RBI’s Monetary Policy Committee continued its pause on rate hikes for the second consecutive policy meeting and kept the repo rate at 6.50%. But there continued to be a cautious tone in the RBI Governor Shaktikanta Das’ press interactions. He doesn’t want anybody to be complacent and rush to the conclusion that inflation has been tamed. What’s troubling the MPC? Let’s find out.
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The June MPC meeting’s outcome was almost a certainty. The MPC would hold on rate hikes considering consumer price inflation (or CPI) in April was at 4.70%. But the market wanted more–for the MPC to go easy on its stance on withdrawing liquidity. Two years after it took emergency measures to rescue India’s economy from the Covid shock, the MPC now wants to withdraw the excesses of the past.
The 18-month low consumer inflation of 4.70% in April 2023, and May 2023 consumer inflation at 4.25% is proof that RBI’s actions of the past 12 months are finally working.
In the past 12 months, the MPC has raised the RBI’s policy rate–the repo rate–by 250 basis points. This is the fastest pace at which RBI’s policy rates have been raised in India.
But why is Governor Das warning us against complacency?
Eye on the number 4
The decision of MPC highlights that RBI remains adamant to tamp down on excess liquidity in the system so that it can reach its target of 4% for consumer price inflation. From its own projections, the RBI doesn’t expect to reach that number anytime soon. Its projection of CPI for FY24 is 5.1%, which is way above its target of 4%, but within its tolerable range of 2%-6%. It’s the seasonal risks to food prices that are worrying the RBI. The impending el nino effect on India’s monsoon and the delayed onset are risks that are worrying the MPC.
Shaktikanta Das, the governor of RBI doesn’t want to waver in anchoring consumer inflation to 4%, having missed hitting that number after India’s monetary policy move to inflation targeting 5 years ago. This means a repo rate cut can be ruled out in FY24, even though some economists believe one may be there in Q4 of FY24.
The RBI maintained its forecast that India’s economy would grow at 6.5% in FY24. RBI’s MPC is trying to balance things out by treading cautiously to sustain the nascent economic recovery for growth.
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