The Reserve Bank of India views ‘high inflation as a major risk to macroeconomic stability and sustainable growth’, and accordingly monetary policy has been resolutely focused on aligning inflation to the 4% target on a durable basis, RBI Governor Shaktikanta Das said on Friday as he announced the Monetary Policy Committee’s unanimous decision to keep the policy repo rate unchanged at 6.50%.
“The MPC also decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” Mr. Das said in his statement.
Elaborating on the MPC’s rationale for leaving interest rates unchanged for a fourth straight meeting, he said a silver lining of declining core inflation (i.e., CPI excluding the food and fuel components) notwithstanding , the overall inflation outlook was clouded by uncertainties that included the fall in kharif sowing for key crops like pulses and oil seeds, low reservoir levels, and volatile global food and energy prices.
Stating that the MPC had expressed concern about the possibility that the recurring incidence of large and overlapping food price shocks could “impart generalisation and persistence to headline inflation,” Mr. Das observed that economic activity, had, however, remained resilient.
“Taking into account the evolving inflation-growth dynamics and the cumulative policy repo rate hike of 250 basis points which is still working through the economy, the MPC decided to keep the policy repo rate unchanged at 6.50% in this meeting,” he added.
Asserting that the MPC remained highly alert and prepared to undertake timely policy measures, as may be necessary, to align inflation to the target and anchor inflation expectations, he observed that headwinds from geopolitical tensions and geoeconomic fragmentation, volatility in global financial markets, global economic slowdown, and the uneven distribution of monsoon rains posed risks to the outlook.
The RBI also retained its real GDP growth forecast for 2023-24 at 6.5% and its forecast for average CPI inflation for the current fiscal year at 5.4%. The MPC, however, raised its headline inflation projection for the second quarter that ended on September 30 by 20 basis points to 6.4%.
He said as per indications food inflation pressures throughout much of Q3, may not see a sustained easing. External factors like energy prices and financial market conditions continued to be volatile, he added.
“All these call for careful monitoring of incoming data and the outlook to clearly delineate the durable components of price shocks from its transitory elements,” he stressed, adding that monetary policy had to be in “absolute readiness to take appropriate and timely action to prevent any spillovers from food and fuel price shocks to underlying inflation trends and risks to anchoring of inflation expectations”. These were non-negotiable necessities, he emphasised.
“I would like to emphatically reiterate that our inflation target is 4% and not 2 to 6%,” Mr. Das stressed in the statement.
Later addressing a press conference, the RBI chief said to keep inflation at 4%. the monetary policy would remain actively anti-inflationary at the current juncture.
“Our aim is to align inflation to the target on a durable basis, while supporting growth. Our commitment to ensure financial stability reinforces our emphasis on price stability and anchoring of inflation expectations. This would keep inflation risk premium low and improve our competitiveness, productivity and growth potential,” he said.
He said liquidity in the system would be actively managed consistent with the monetary policy stance. Open Market Operation (OMO) sales would be undertaken as necessary.
“The financial sector balance sheet remains robust. While the RBI is closely monitoring the emerging trends, banks and NBFCs are expected to strengthen their internal surveillance mechanisms and institute suitable safeguards where ever necessary,” the Governor said, referring to the rapid rise in personal loans in recent months.
“Financial stability is fundamental to price stability and growth. The external sector is eminently manageable. Domestic economic activity continues to be resilient and India is poised to become the new growth engine of the world,” Mr. Das asserted.
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