10th June 2023 (8 Topics)
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Unwavering focus
Context:
- In the Monetary Policy Committee (MPC)’s latest decision to extend the pause in the Reserve Bank of India (RBI)’s monetary tightening has emphasized the importance of price stability as the best contribution of monetary policy to the economy's growth potential.
Present stance of monetary policy committee:
- To sustain Inflation risks: The rate setting panel’s reassuring resolve to keep inflation front and centre of its approach to policy.
- To maintain price stability: The MPC's unwavering focus on price stability is driven by its mandate to achieve a Consumer Price Index (CPI) inflation target of 4%, which has been challenging to meet since January 2021.
- Stagnant situation: Inflation has remained consistently above or near the upper tolerance band of 6% for most of the past 27 months.
Factors behind the move:
- Curbing headline inflation: The headline inflation had decreased notably, reaching 4.7% in the first month of the current fiscal year compared to the average pace of 6.7% in 2022-23.
- CPI inflation: The MPC anticipates CPI inflation to average 5.1% over the 12 months ending in March 2024.
- Uncertainties in global economies: The committee recognizes the on-going challenges in aligning inflation with the target, considering the uncertainties in the global landscape.
Risks associated:
- Uncertain weather conditions and food inflation: The spatial and temporal distribution of rainfall during the current monsoon due to El Niño conditions, geopolitical tensions, uncertainty surrounding international commodity prices (such as sugar, rice, and crude oil), and volatility in global financial markets.
- Slow consumption activity: The increase in credit costs resulting from the RBI's interest rate hikes since May 2022 has had a dampening effect on investment and consumption activity.
- The higher borrowing costs: It is likely to contribute to a contraction in estimated private consumption spending in the fourth quarter of the previous fiscal year.
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