RBI Monetary Policy: MPC keeps FY25 inflation forecast unchanged at 4.5%

RBI MPC Announcement: RBI MPC Announcement: The Reserve Bank of India (RBI) maintained its 4.5% inflation projection for FY2025 with Q2 at 4.4%, Q3 at 4.7%, Q4 at 4.3%, and Q1FY26 at 4.4%. The risks are evenly balanced, said Governor of the RBI, Shaktikanta Das today.

Das stated that the headline inflation hit a stop to 5.1% in June 2024 due to higher than expected. Food inflation and fuel remained in deflation for the 10th consecutive month. Core inflation moderated to a historic low in the months of May and June. Food inflation, which has a weight of around 46% in the consumer price index (CPI) basket, contributed to more than 75% of headline inflation in May and June. Vegetable prices increased sharply and contributed to about 35% of inflation in June; high inflation pressures persisted across other major food items.

“Headline inflation has moderated from its peak but unevenly. Looking ahead, food price momentum has remained elevated in July. In Q2:2024-25, though favourable base effects are large, the sharper uptick in price momentum relative to earlier expectations is likely to result in a shallower softening of CPI headline inflation. Inflation is expected to edge up in Q3 as favourable base effects taper off,” said Shaktikanta Das.

On the other hand, Das highlighted the fact that the softening in core inflation continues to be broad-based, with core services inflation touching a new low in the current CPI series during the months of May and June 2024. The high food price momentum is likely to have continued in the month of July.

“Under the current monetary policy setting, inflation and growth are evolving in a balanced manner, overall macroeconomic conditions are stable, and growth remains resilient. Inflation has been trending downward, and we have made progress in achieving price stability, but we have more resistance to the progress towards our goal of price stability, which has been uneven due to large and persistent supply side shocks, especially in food items. We therefore need to remain vigilant to ensure that inflation moves sustainably towards the target while supporting growth. This approach would be net positive for sustained a lot,” explained RBI Governor.

Das stated that the Monetary Policy Committee (MPC), after a detailed assessment of the evolving macroeconomic and financial conditions and the overall outlook, has decided by a majority to keep the policy repo rate unchanged at 6.5%. Consequently, the standing deposit facility rate remains at 6.25%, and the marginal standing facility rate and the bank rate are at 6.75%. The MPC also decided by a majority of four out of six members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target while supporting growth.

Das went on to say that the MPC has reiterated the need to maintain the disinflationary approach until the headline CPI inflation is consistently aligned with the objective. Strong foundations are laid by long-term price stability for a prolonged period of rapid expansion. Therefore, the MPC believes it is appropriate to keep up the disinflationary stance of withdrawing accommodation in order to support growth while ensuring that inflation gradually converges to the target.

The policy repo rate was kept at 6.50% by Drs. Shashanka Bhide, Rajiv Ranjan, Michael Debabrata Patra, and Shri Shaktikanta Das. Professor Jayanth R. Varma and Dr. Ashima Goyal voted in favour of a 25 basis point drop in the policy repo rate.

Drs. Shashanka Bhide, Rajiv Ranjan, Michael Debabrata Patra, and Shri Shaktikanta Das voted in favor of keeping the focus on withdrawing accommodation in order to sustain development while ensuring that inflation gradually approaches the objective. Professor Jayanth R. Varma and Dr. Ashima Goyal voted in favor of shifting to a neutral position. The MPC's upcoming meeting is set for October 7–9, 2024.

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