The Reserve Bank of India has decided to keep the repo rate unchanged at 6.5%. This comes as no surprise, given the inflation scenario. The latest meeting of the RBI’s Monetary Policy Committee (MPC) has revised inflation upward from 5.1% to 5.4% for the 2023-’24 financial year. Those rooting for a cut in the interest rates must bear in mind that the central bank’s primary goal is to maintain stable inflation which is critical for sustainable growth. While monetary tightening is negative for the short term, it is important to keep inflation under control which, in turn, facilitates long-term growth. The high inflation has made life miserable for the people of India. The prices of food items in particular have risen so high that people are finding it difficult to manage.
The RBI is expected to keenly observe how the inflation scenario pans out in the coming months. Any easing of monetary policy would occur only when the average retail price inflation approaches the RBI’s target of 4%. If the RBI adheres to this criterion, a rate cut even by late 2024 appears unlikely. When RBI is more concerned about containing inflation, it raises interest rates, thereby depressing economic activity, and when it wants to stimulate growth, it brings down the interest rates. Though the fundamentals of the Indian economy are resilient and strong, rising inflation is a major cause for concern. The RBI appears to be concerned due to uneven monsoon in some parts of the country which has contributed to an increase in vegetable prices.