Actively disinflationary

MONETARY POLICY - KEY RBI FORECASTS SUGGEST REPO RATE CUTS WON'T BE FEASIBLE FOR MOST OF FY25

- SAUGATA BHATTACHARJEE

THAT THE MONETARY Policy Committee (MPC) would hold the policy repo rate unanimously-at 6.5% was a foregone conclusion, as was the (likely) 5-1 vote to maintain the "focused on withdrawal of accommodation" stance. The global macro-financial environment, and hence, domestic financial conditions and the continuing risks of inflation remain too fluid for any material change.

In the context of this status quo in policy action, to my mind, there was a subtle hardening in the language and idiom of the statement. The assertion that "monetary policy must continue to be actively disinflationary" was articulated for the first time. This suggests, and is reinforced by public comments, that inflation control remains the primary objective of monetary policy, even as it continues to support growth. This is justified by multiple underlying trends.

One, the large increase in the RBI's growth forecast, from the earlier 6.5% to 7%, was the biggest surprise in this policy review and testifies to the RBI's assessment of resilient demand conditions and disposable incomes. The average CPI inflation rate for FY24 was retained at 5.4%, and thereafter is projected to fall only gradually in FY25.

Read together, in addition to the frequent mentions of food inflation risks, there is also the latent risk of a creep-up in (non-food and fuel) core inflation.

While crude oil prices have softened recently, in anticipation of slower activity in developed markets, expected OPEC+ output cuts remain a concern on pass-throughs into transport and agriinput costs.