RBI opens FY25 with holding action to ease inflation

KEEPING VIGIL. The elephant (inflation) has to return to the forest and remain there on a durable basis, says Governor Shaktikanta Das

As was widely expected, the RBI’s ratesetting panel stood pat on the policy repo rate at its first meeting of FY25 on Friday to ensure that volatile food prices do not impede the ongoing disinflation process and retail inflation aligns with its 4 per cent target.

Reserve Bank of India Governor Shaktikanta Das emphasised that the “elephant (retail inflation), which has now gone out for a walk and appears to be returning to the forest, has to return to the forest and remain there on a durable basis”. He said that though inflation has come down significantly, it remains above the 4 per cent target

The Monetary Policy Committee (MPC) members decided 51 to keep the policy repo rate (the interest at which banks borrow from RBI to overcome shortterm fund mismatches) unchanged at 6.50 per cent. The MPC had maintained status quo on repo rate in all the six meetings in FY24.

The members also decided by a similar majority to remain focussed on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Das underscored that “It is essential, in the best interest of the economy, that CPI inflation (which eased to 5.1 per cent during January and February from 5.7 per cent in December) continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished.”

Looking ahead, the Governor observed that robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4 per cent. RBI has projected CPI for FY25 at 4.5 per cent.

“As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation.

“Under these circumstances, the monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions,” Das said.

RATE CUTS EXPECTED

Referring to RBI retaining its FY25 retail inflation projection at 4.5 per cent, SBI Chief Economic Advisor Soumya Kanti Ghosh said the outlook will largely be shaped by food price uncertainties (indications of a normal monsoon on one side while increasing incidence of climate shocks on the other).

“The good thing, however, is that with 4 per cent inflation target in FY26, the RBI is possibly guiding the market with a prolonged rate cut cycle... We expect a series of rate cuts beginning October, followed by another in December and possibly in February 2025. The stance change can happen in October itself,” Ghosh said.

Abheek Barua, Chief Economist and Executive VicePresident, HDFC Bank, observed that given the recent global resilience in economic activity, there has been a tendency to keep monetary policy tight to take on the lastmile challenge on inflation by global central banks. The RBI seems to be moving in lock step with that.

INFLATIONARY PRESSURE

Crisil’s Chief Economist Dharmakirti Joshi and Senior Economist Pankhuri

Tandon observed that the “transmission impact of rate hikes since May 2022 and regulatory measures on risky lending are still playing out. This, coupled with fiscal consolidation, could lead to some moderation in GDP growth this fiscal,” they said.