After unanimously pausing for the second time in a row, the Reserve Bank on Thursday reiterated that leaving the key rates and the stance unchanged “is not a pivot but only a pause” and that future policy actions will purely be data-dependent as a durable fall in inflation is still a long way.
Earlier in the day, the RBI governor-led rate-setting panel MPC unanimously left the repo rate unchanged at 6.50 per cent and maintained that they will continue to work towards withdrawing policy accommodation.
The six-member panel also reiterated continuing measures to bring inflation under the target in a durable manner.
While consumer price index -based inflation eased in March and April and moved into the tolerance band, headline inflation is still above the mandated target of 4 per cent and is expected to remain so during the rest of the current fiscal, said Governor Shaktikanta Das announcing the monetary policy.
"Therefore, close and continued vigil on the evolving inflation outlook is absolutely necessary, especially as the monsoon outlook and the impact of El Nino remain uncertain. Our goal is to achieve the inflation target of 4 per cent in a durable manner and not just keeping inflation within the comfort band of 2-6 per cent," Das told reporters at a post-policy presser.
The governor parried repeated questions from the media about what holds back the MPC and RBI from uttering the words 'end of rate hikes' or the beginning of a neutral or accommodative policy stance.
“It is not a pivot; I reiterate this is only a pause, which is the second one in two successive reviews. Our future policy actions will purely be dependent on evolving situations. Because even though the recent fall in headline inflation to within the target band (led mainly by the cooling core inflation), we need to ensure that it is durable, and therefore there is no room for complacency on inflation,” Das said.
Explaining that RBI is only on a pause and that there is no change to a neutral/accommodative stance, Das said, “our objective is to ensure that inflation aligns with the mandated target on a durable basis and not a one-off.
"I wish to emphasise that we will do whatever is necessary to ensure that long-term inflation expectations remain firmly anchored. The Reserve Bank will remain watchful and proactive in dealing with emerging risks to price and financial stability”.
“Therefore, given the uncertainties, we need to maintain 'Arjuna's eye' on the evolving inflation scenario. Let me re-emphasise that headline inflation still remains above the target and being within the tolerance band is not enough. Our goal is to achieve the target of 4 per cent, going forward," the governor said, adding it is always the last leg of the journey that's the toughest.
His deputy and the head of the monetary policy department at the central bank, Michael Patra said the policy stance and inflation forecast for the year wherein they expect the prices index to hover around 5.1 per cent for the year, the impact of the MSP hike for paddy (10-12 bps) and the likely impact of the El Nino on the monsoon are factored in.
This forecast, it can be noted is a marginal improvement from the April forecast, when it had projected the prices to average at 5.2 per cent during FY24.
Retail inflation fell sharply to 4.7 per cent in April from 6.4 per cent in February, on the back of favourable base effects, with softening observed across all the three major groups. In March, it fell to 5.67 per cent from 7.79 per cent in February.
The MPC retained the growth projections for the fiscal at 6.5 per cent. The economy grew 7.2 per cent in the previous fiscal.
On growth, Das said higher rabi crop production, expected normal monsoons, continued buoyancy in services and softening inflation should support household consumption.
On the other hand, given the healthy twin balance sheets of banks and corporates, supply chain normalisation and declining uncertainty, conditions are favourable for the capex cycle to gain momentum.
Robust government capital expenditure is also expected to nurture investment and manufacturing activity. RBI had since May 2022, cumulatively raised the repo rate by 250 basis points.