RBI Holds Rates Steady, Emphasizing Caution on Inflation
The Reserve Bank of India (RBI) decided to maintain the repo rate at 6.5% on Wednesday. Governor Shaktikanta Das emphasized the need for caution on inflation, despite recent signs of moderation.
While the RBI maintained its retail inflation estimate for FY25 at 4.5%, Das warned against complacency. "We have to be very careful about opening the gate, as the inflation horse may bolt again," he cautioned.
The governor's comments reflect a delicate balancing act between managing inflation risks and supporting economic growth. Although headline inflation has shown signs of easing, Das highlighted the challenges in achieving "the last mile of disinflation" and the significant risks that remain. He noted that the evolving domestic price situation suggests some moderation ahead, but stressed the need to closely monitor conditions for further disinflationary impulses.
The RBI's Monetary Policy Committee (MPC) also shifted its policy stance from "withdrawal of accommodation" to "neutral," indicating a more balanced approach toward growth. This decision comes in the context of India's steady economic growth, with real GDP projected to grow by 7.2% in FY25, supported by Q2 growth at 7%, and 7.4% in Q3 and Q4.
However, some experts questioned the decision to hold rates. Deepak Shenoy, founder of Capitalmind, noted that the RBI's justification based on weather, food, and fuel prices seemed inadequate. He also expressed concern about the RBI's potential role in fueling inflation through substantial USD purchases, highlighting the need to understand the broader impact of these actions.
The RBI's stance reflects a cautious approach, aiming to strike a balance between inflation control and sustaining growth. As Das put it, while the "inflation horse" may currently be in the stable, the central bank remains wary of it breaking free, underscoring the importance of vigilance in the months ahead.