Expectedly, the Reserve Bank of India’s six-member Monetary Policy Committee at its meeting last Friday kept the policy repo rate unchanged at 6.5%. This is for the fourth consecutive time that the MPC has kept the benchmark rate unchanged. Core inflation, that is, minus food and fuel, is declining but the headline inflation is worrying. Consumer price inflation needs to be watched carefully. It is still way above the central bank’s tolerance level which is 4%, though the government had set the bank a target of 4% plus or minus 2%. Consumer price inflation has tended to ease a bit in recent weeks due to a correction in vegetable prices and a reduction in LPG prices. The effect of the further subsidy on LPG cylinders by the central government is also likely to have a positive impact on the CPI. The RBI expects inflation to average 5.4% in the entire 2023-24 period. RBI Governor Shaktikanta Das has listed some of the factors that could push inflation in the coming months. Among these were the production of pulses and onions, El Nino phenomenon and global energy prices. All these factors not intervening strongly in the coming months, RBI expects to tame inflation within the targeted range of 4-4.5% in the next financial year.
On growth the central bank has kept its projection of 6.5% for the current financial year unchanged. Festive season demand, revival in rural demand and a certain buoyancy in the services sector are positive factors. Government expenditure on infrastructure as also a slight pick- up in private spending would aid growth. To mop up excess liquidity in the system the RBI announced open market operations to auction bonds: “Going forward, while remaining nimble, we may have to consider OPO sales to manage liquidity, consistent with the stance of the monetary policy. The timing and quantum of such operations will depend on the liquidity conditions.” The RBI Governor warned that excessive liquidity can be a risk to price and financial stability. Most likely the recent junking of the Rs 2,000 currency notes too may have added to the liquidity which the central bank would like to manage before it has a cost-push effect on the overall economy. However, the global crude prices, which have tended to moderate in recent days, could still play havoc with the RBI’s projections. Thus far, the country has managed the crude situation rather well, exploiting the western sanctions against Russia to import huge quantities of Russian crude oil at somewhat discounted prices. Ahead of the festival season, the economy seems to be on track to be among the fastest growing in the emerging markets.
