The Monetary Policy Committee (MPC) of the Reserve Bank of India has unanimously and wisely decided to apply a temporary pause to its inflation-battered monetary tightening by keeping the repo rate unchanged. RBI Governor Shaktikanta Das was insistent that the pause decision was “for this meeting only”, underscoring the commitment to ensure that retail inflation is progressively in line with the mandated target of 4%. Clearly, developments in the global financial system, especially the banking sector turmoil, and the volatility and uncertainty caused by them, have heavily influenced policymakers’ wait-and-see decision. Despite their assertion that India’s ‘banking and non-banking financial services sectors remain healthy and economic activity remains resilient’, it is the specter of rising credit costs that pose risks to both consumption demand and private investment. which was an important factor in the World Bank’s calculations. Earlier this week, when it cut India’s 2023-24 growth forecast to 6.3%. With the global economy still facing headwinds including continuing geopolitical tensions, which the World Bank warned could trigger a recession if further shocks occur, RBI policymakers have, for now, focused on inflation. It has chosen judiciously to subordinate its concerns, so as to ensure that the pace of development is not slowed down.
Still, monetary officials have only a short window in which to see whether their forecast of a reduction in inflation has indeed come to fruition. The MPC faces a challenge in its mandate of achieving sustainable deflation, with Mr Das acknowledging that core inflation across a range of goods and services has risen and is stable. As noted in the RBI’s latest monetary policy report, upside risks to the inflation outlook emanate from higher global crude and commodity prices and factors including extreme weather conditions and deficient monsoon rains. As Mr. Das has already acknowledged, the recent announcement of sudden production cuts by OPEC+ producers has resulted in a jump in crude oil prices, which have hit the Reserve Bank of India’s crude average of $85 a barrel (Indian Rupee) this year. for the basket) can reverse the assumption. Similarly, uncertainty looms large over food prices given unseasonal rains in some parts of the country and the possibility of El Nino, which could raise summer temperatures and reduce monsoon rains. Additionally, the RBI expects milk prices to remain stable in the coming months amid pressure from feed costs. Policymakers must remember that, as the RBI chief so succinctly put it, price stability still remains “the best guarantee for sustainable growth”.