Rbi: RBI holds rates for 3rd time but Das flags inflation risks

MUMBAI: RBI governor Shaktikanta Das indicated that interest rates may rise if inflation worsens while announcing the monetary policy committee’s unanimous decision to hold the repo rate at 6.5% for the third meeting in a row. Das also raised the inflation forecast for the current financial year to 5.4% from 5.1%.

While uncertainties linked to domestic food prices have prompted the RBI to raise its inflation forecast, it has retained the growth forecast for the current fiscal at 6.5%. “The policy repo rate remains unchanged with preparedness to act if the situation warrants,” said Das.
Das also announced an incremental cash reserve ratio of 10% on the increase in deposits between May 19 and July 28 to absorb surplus liquidity generated due to the return of Rs 2,000 notes.

Worried over the spike in vegetable prices, particularly tomatoes, the RBI said that bringing inflation within the tolerance band (2-6%) is not enough, and there is a need to align inflation to the 4% target. “Inflation projection for Q2 of FY24 has been revised up substantially, primarily due to the price shock from vegetables. Given the likely short-term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time,” Das said. The RBI has hiked the retail inflation projection for Q2FY24 to 6.2% from 5.2%.
“The role of continued and timely supply-side interventions assumes criticality in limiting the severity and duration of such shocks. In such circumstances, it is necessary to be watchful of the emerging trends and risks to price stability. We have to stand in readiness to go beyond keeping Arjuna’s eye to deploying policy instruments,” he said.
“With capacity utilisation currently running higher than the long-term trend, the central bank does have the bandwidth to look through the current increase in food prices,” SBI chairman Dinesh Khara said. He added that the vigilance on the inflation trajectory was warranted given the jump in vegetable prices.