What's the article about?
- It talks about decisions made at the recent Monetary Policy Committee (MPC)’s meeting.
Relevance:
- GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment;
- Prelims
Context:
- The Monetary Policy Committee (MPC) in its recent meeting announced its decision to leave the repo rate unchanged at 6.5 per cent.
- The RBI Governor said inflation appears to be easing but remains above the central bank's target range.
- The MPC, which voted unanimously to keep the repo rate on hold, also decided to maintain the stance at “withdrawal of accommodation”.
Analysis:
- This decision reflects the MPC’s reassuring resolve to keep inflation front and centre of its approach to policy.
- RBI Governor Shaktikanta Das was unequivocal in asserting that “the best contribution of monetary policy to the economy’s ability to realise its potential is by ensuring price stability”.
- The MPC’s recent unwavering focus on price stability is informed largely by its mandate to achieve the Consumer Price Index (CPI) inflation target of 4%, a goal that it has struggled to actualise right since January 2021 — a period during which inflation remained stuck above or close to the upper tolerance band of 6% in 20 of the 27 months.
- The RBI Governor acknowledged that even as headline inflation had eased appreciably in March and April, slowing to 4.7% in the first month of the current fiscal year from the bruising 6.7% average pace in 2022-23, retail price gains were ‘still above the target and expected to remain so according to the RBI’s projections for 2023-24’.
- The MPC, which has forecast CPI inflation to average 5.1% over the 12 months ending in March 2024, is cognisant of the continuing challenges in aligning inflation with the target, given the global uncertainties.
- The spatial and temporal distribution of rainfall during this monsoon in the wake of El Niño conditions, unabated geopolitical tensions, uncertainty over international commodity prices including those of sugar, rice and crude oil, and the volatility in global financial markets are some factors which can fuel inflation in coming months.
- Another key factor feeding into the RBI’s policy approach is its conviction that macroeconomic fundamentals have strengthened after the unrelenting focus on preserving price and financial stability.
- To be sure, the increase in credit costs since the RBI started raising its benchmark interest rates in May 2022 appears to have retarded investment and consumption activity last year.
- Bank credit data show the pace of growth in loans to industry, particularly the MSME and medium sectors, slowed appreciably last year.
Way Forward:
- The policymakers cannot afford to take their eyes off inflation. Price stability is after all a public good and achieving durable disinflation must remain a non-negotiable goal, especially amid widening income inequality and high levels of joblessness.
