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Holding the line
Context:
The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) opted to maintain the repo rate at 6.5 percent, alongside a continued focus on disinflationary policy.
Monetary Policy Decision:
- Unchanged Interest Rates: The Monetary Policy Committee opted to maintain the repo rate at 6.5 per cent, aligning with expectations.
- Focus on Disinflationary Policy: The Committee emphasized the need for continued active disinflationary policy to align inflation with the target of 4 per cent on a durable basis.
- Divergent Views: While the decision to keep interest rates unchanged was largely supported by the committee, MPC member Jayanth Varma dissented, advocating for a reduction in the repo rate and a shift in policy stance to neutral.
Inflation Outlook and Uncertainties:
- Current Inflation Trends: Retail inflation in December saw a slight uptick to 5.69 per cent, mainly driven by rising food prices, while core inflation dipped to 3.8 per cent.
- Future Projections: The RBI anticipates inflation to trend lower to 5 per cent in the fourth quarter and further moderate to 4.5 per cent for the next financial year (2024-25), contingent upon factors such as a normal monsoon.
- Uncertain Outlook: Geopolitical tensions, adverse weather events, and potential supply chain disruptions pose uncertainties that could influence inflation trajectory, warranting vigilance from policymakers.
Economic Growth Expectations and Policy Implications:
- Optimistic Growth Outlook: Despite inflation concerns, the RBI Governor remains optimistic about economic momentum, foreseeing industrial activity gaining steam, resilient services sector, and robust rural and urban consumption.
- Forecasted Growth Rate: The central bank expects the Indian economy to grow at 7 per cent in the fiscal year 2024-25, propelled by sustained government spending and investment activity.
- Policy Divergence: While the majority of the MPC supports the current policy stance, dissenting views highlight the potential for policy adjustments in response to evolving inflation dynamics and economic conditions.
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