RBI Maintains Policy Rates Amid Rising Food Inflation Concerns

The Reserve Bank of India (RBI) decided to keep key policy rates unchanged, citing concerns over rising food inflation. A rate cut is unlikely before December 2024, with potential delays if inflation persists. The RBI remains cautiously optimistic about economic growth, projecting a GDP growth of 7.2% for FY25.

The Reserve Bank of India (RBI) has decided to maintain its key policy rates, attributing the decision to ongoing concerns about rising food inflation. The Bank of Baroda (BOB) report indicated that, given the current outlook on food prices, particularly vegetables, a rate cut is unlikely before December 2024. BOB further cautioned that if inflationary pressures persist, any rate reduction could be further delayed. The Monetary Policy Committee (MPC) voted 4-2 in favor of keeping the current policy stance, revealing a growing split among members regarding the direction of monetary policy.

For the second consecutive meeting, MPC members Dr. Ashima Goyal and Professor Jayanth R. Varma voted in favor of a rate cut, signaling a push for monetary easing. Notably, Professor Varma has advocated for a rate reduction since February 2024. Despite these calls, the RBI Governor's hawkish statements during the meeting emphasized the impact of elevated food prices on overall inflation. The RBI maintained its GDP growth projection for FY25 at 7.2%, despite revising down the Q1 FY25 forecast slightly to 7.1%, reflecting lower corporate profitability and reduced government capital expenditure.

Despite the challenges, the RBI projects optimistic economic growth buoyed by increased private expenditure and a robust services sector. However, the central bank warned that elevated food inflation could impact rural demand recovery. Inflation projections for FY25 remain at 4.5%, with Q2 and Q3 forecasts adjusted to 5.0% and 4.6%, respectively. The RBI Governor also addressed financial stability concerns, notably SCBs' reliance on non-deposit instruments, and proposed regulatory measures to strengthen the digital payment ecosystem.

(With inputs from agencies.)