The decision to leave the policy rate unchanged by the Reserve Bank of India’s Monetary Policy Committee (MPC) is seen as a calculated risk, especially when considering the upward revision of its inflation forecast. The projection for Consumer Price Index-based inflation, which was initially set at an average of 5.1% for the current fiscal year ending in March 2024, has been raised by 30 basis points to 5.4%. A spike in tomato prices has led to a substantial 100 basis points revision in the headline inflation projection for the July-September quarter, now at 6.2%. Acknowledgment by RBI Governor Shaktikanta Das emphasizes the short-term nature of these shocks, allowing policymakers to overlook a couple of high inflation prints. However, frequent food price shocks pose a risk of destabilizing inflation expectations. The responsibility for timely supply side interventions to mitigate these shocks is placed on the government, as reiterated by the monetary authorities. Nevertheless, a broader deviation from price stability is highlighted as a potential threat to macroeconomic stability and growth. The MPC’s commitment to aligning inflation with the 4% target and anchoring inflation expectations is underscored, and its policy stance of focusing on the withdrawal of accommodation is reiterated by a majority.
In alignment with the MPC’s stance, a temporary incremental increase of 10% in the cash reserve ratio, which banks are required to maintain, has been imposed by the RBI. This move aims to reduce surplus liquidity in the banking system that could contribute to rising prices. Mr. Das assures a review of this increase by September 8 or earlier to ensure adequate liquidity during the upcoming festival season. Despite the MPC’s positive outlook on economic growth, its forecast for real GDP expansion of 6.5% in 2023-24 remains unchanged. The MPC stands by its June projections for growth in each quarter, despite the inflation shock. Several risks to the inflation outlook have been identified, including uneven rainfall distribution, recent increases in crude oil prices, and the anticipation of higher output prices by enterprises polled by the RBI. While Mr. Das and his colleagues on the MPC express readiness to take policy actions to align inflation with the target and anchor inflation expectations, the speed at which policymakers intervene in the coming months will determine their ability to combat inflation.