RBI goes for status quo on inflation risk

Mumbai: The Reserve Bank of India expectedly left its key interest rate unchanged on Friday as inflation remains a major risk, and signalled it would keep liquidity tight using bond sales to bring prices closer to target.

The monetary policy committee, which has three members from the central bank and a similar number of external members, held the benchmark repurchase rate (repo) at 6.50 per cent in a unanimous decision for the fourth consecutive meeting in a row. It retained ‘withdrawal of accommodation’ stance.

Governor Shaktikanta Das said the central bank has identified high inflation as a major risk to macroeconomic stability and sustainable growth and “remains resolutely focused on aligning inflation to the 4 per cent target on a durable basis”. The incomplete transmission of past 250 basis-points rate hikes to bank lending and deposit rates reinforced MPC’s imperative to continue its stance of withdrawal of accommodation, he said.

Despite the second quarter bulge in inflation, the RBI kept its inflation forecast for the current fiscal unchanged at 5.4 per cent. Annual retail inflation eased to 6.83 per cent in August, from a 15-month high of 7.44 per cent in July, but remained well above the central bank’s 2-6 per cent comfort band. However, silver lining is drop in core inflation (retail inflation excluding food and fuel) to below 5 per cent. Upping the ante against inflation, the central bank may consider selling bonds to soak up excess funds from the banking system, he said.

“The timing and quantum of such operations will depend on the evolving liquidity conditions. Food inflation remains a key monitorable not only because it is in double digits, but also because sub-normal monsoon and muted sowing can impact kharif output and prices. Additionally, low reservoir levels do not augur well for the rabi crops. Also, crude oil has seen a lot of volatility of late. The need of the hour is to remain vigilant and not give room to complacency,” Das said.

“While near-term inflation is expected to soften on the back of vegetable price correction, especially in tomatoes, and the reduction in LPG prices, the future trajectory will be conditioned by a number of factors,” he said, adding CPI inflation is likely to fall below 6 per cent in the current quarter and to 5.2 per cent in the next.