RBI retains key rates as inflation bites

Food inflation remains stubbornly high. Without price stability, high growth can’t be sustained. Monetary policy must continue to be disinflationary - Shaktikanta Das, Governor, RBI

Withdrawal of Accommodation Intact

♦ MPC also decided to retain a policy stance at ‘withdrawal of accommodation’

♦ The decision aims at bringing inflation to 4%

♦ Inflation in July climbed to 5.08% driven by food prices

Mumbai: The Reserve Bank of India (RBI) on Thursday expectedly kept the benchmark interest rate and stance unchanged for the ninth straight policy meeting, saying it can’t afford to look through persisting high food inflation and has to remain vigilant to prevent spillover.

Retaining its unambiguous focus on inflation, the Monetary Policy Committee (MPC), which consists of three RBI and three external members, kept the benchmark repurchase or repo rate unchanged at 6.50 per cent. Four out of the six members of MPC voted in favour of the rate decision. The panel, whose four-year term ends in October, also decided to retain a policy stance at ‘withdrawal of accommodation’ to aid MPC’s focus on bringing inflation towards its four per cent target. Inflation climbed to 5.08 per cent in June, primarily driven by the food component.

RBI Governor Shaktikanta Das said food inflation remains stubbornly high. “Without price stability, high growth cannot be sustained,” he said, adding that “monetary policy must continue to be disinflationary”.

He said the MPC could have looked through high food inflation if it was transitory. “But in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so. It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility.”

The MPC last revised interest rate in February 2023, when it was hiked to 6.5 per cent. The status quo by RBI comes amid varied central bank action in advanced economies. While the Bank of England (BoE) reduced interest rates last week, Bank of Japan (BoJ) hiked rates to their highest levels since 2008.

Also, fears of a US recession have risen on the back of weak employment numbers, piling up pressure on the Federal Reserve to start cutting rates to support the economy. RBI retained India’s GDP growth forecast at 7.2 per cent and headline CPI inflation at 4.5 per cent for the current fiscal 2024-25.

The Governor flagged alternative investment avenues becoming more attractive to retail customers leading to bank deposits trailing loan growth.