Inflation remains the focal point of stance

The Reserve Bank of India (RBI) on Thursday retained its ‘withdrawal of accommodation’ stance, surprising many who were expecting it to move to a neutral stance. With inflation being expected to ease, the bond market had been hoping for a slightly more dovish stance, but five of the six members of the MPC voted in favour of retaining it.

Economists attributed the unchanged stance to the RBI’s objective to lower inflation to 4%. The central bank projected inflation at 5.1% for FY24, with April-June at 4.6%, July-September at 5.2%, October-December at 5.4% and January-March at 5.2%.

State Bank of India chief economic adviser Soumya Kanti Ghosh observed that the RBI decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth, though not unanimously. “The inflation trajectory is likely to be shaped by food price dynamics. Milk prices may pose threat also due to supply shortfalls. Crude prices, on the other hand, have eased,” Ghosh opined.

The declining current inflation as well as declining inflation expectations for next financial year indicate that there is no conflict in inflation and its expectations. This signifies that the lagged impact of rate hikes will be able to successfully control inflation in the target band, say economists.

Abheek Barua, senior economist, HDFC Bank, pointed out that the central bank lowered its inflation forecast only marginally to 5.1% and seems to be building in a buffer for any food prices spikes due to weather-related disturbances during the monsoon season. “If indeed these risks do not pan out, inflation could be lower than the RBI’s projections, leading to subsequent communications becoming more dovish,” Barua observed.

The RBI restated its resolve to “remain nimble in its liquidity management, while ensuring that adequate resources are available for the productive requirements of the economy”. To ensure effective management of liquidity, the RBI has conducted variable rate reverse repo (VRRR) of different tenures.

“Any formal change in the stance in the immediate run would have kindled hopes of an imminent rate cut in markets and induce a further easing of monetary conditions, risking undoing the hard-earned transmission of the last year,” Madhavi Arora, lead economist at Emkay Global Financial Services, said. “This is especially because despite easing pressures, the MPC is still concerned about inflation, stressing the need to ensure a ‘durable disinflation’ process.”