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Prudence prevails
Context
The RBI's Monetary Policy Committee (MPC) has decided to maintain benchmark interest rates unchanged and continue with its stance of 'withdrawal of accommodation' to ensure inflation aligns progressively to the target. Despite strong domestic economic momentum, uncertainties in food prices pose challenges to the headline inflation trajectory.
Policy Decision and Rationale:
- RBI's Monetary Policy Committee (MPC) stance: The RBI's Monetary Policy Committee (MPC) has decided to maintain benchmark interest rates unchanged and continue with its stance of 'withdrawal of accommodation' to ensure inflation aligns progressively to the target.
- Concerns over food price pressures: Despite strong domestic economic momentum, uncertainties in food prices pose challenges to the headline inflation trajectory.
- Decision to maintain benchmark interest rates: Governor Shaktikanta Das cites concerns over food price pressures, which could potentially impact broader headline inflation, as a key factor in the decision to keep the repo rate unchanged at 6.5%.
Uncertainty Surrounding Food Prices:
- Discussion on food price gains in the RBI Bulletin: Recent discussions within the RBI Bulletin highlight the uncertainty surrounding food price gains and their potential impact on overall inflation.
- Risks posed by food inflation to overall inflation: Empirical evidence suggests that food inflation can sometimes mimic core inflation, posing risks to price stability by de-anchoring inflation expectations.
- Challenges despite improvements in agricultural activities: Despite some improvements in rabi sowing and seasonal corrections in vegetable prices, the average retail prices of key food items remain higher on a year-on-year basis, emphasizing the need for policymakers' resolve to curb inflation.
Challenges and Policy Response:
- Need for policymakers' resolve to curb inflation: Policymakers need to stay steadfast in their resolve to durably slow price gains towards the 4% target or risk dampening consumption and thereby undermining the growth momentum.
- Downward revision of inflation projection: The MPC's downward revision of its projection for average retail inflation in the January-March quarter reflects the cautious optimism regarding improvements in agricultural activities and seasonal factors affecting food prices.
- Importance of maintaining stance: Maintaining a disinflationary monetary policy stance remains crucial to anchor inflation expectations and ensure price stability amidst uncertainties in food prices and their potential impact on broader inflation trends.
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