Oil rose above $80 Monday for the first time since August, driven by the Middle East tensions. Oil futures have been fluctuating recently, with Brent crude dipping below $70 last month due to fears of weak demand. However, escalating conflict in the Middle East caused a sharp reversal, pushing prices up by 10% last week.
The Reserve Bank of India’s (RBI) Monetary Policy Committee in five-to-one majority decided to keep the repo rate – key lending rate- unchanged at 6.5% for the tenth time in a row. The rate-setting panel also unanimously to change the policy stance to neutral from focus on withdrawal of accommodation. It also decided to remain unambiguously fcused on a durable alignment of inflation with the target while supporting growth.
New MPC team, Fed’s jumbo cut – but same story?
The decision comes after the Monetary Policy Committee added three fresh faces after the tenures of Shashanka Bhide, Ashima Goyal and Jayanth Varma ended. Goyal and Varma were the voices of dissent in MPC’s stance to keep rates unchanged in recent monetary policy meetings as they advocated for rate cuts. While economists had said the new faces (Ram Singh, Nagesh Kumar and Saugata Bhattacharya) in the six-member monetary policy committee didn’t have much time to call for rate cuts, this reshuffle may however go ahead and alter the split within the panel in demand for rate cuts. Moreover, the tenure of RBI Governor Shaktikanta Das is set to end soon as well.
The decision to leave rates unchanged also comes after the Federal Reserve went for a jumbo rate cut of 50 bps in September, the first rate reduction since 2020.Nonetheless, RBI’s decision may be based on the bountiful rains the swathes of India’s farm land received in recent weeks and other domestic factors if we are to believe that Governor Shaktikanta Das is sticking to his stance of not towing the developed world in monetary policy making.
Behind RBI’s inflation forecast
“Headline inflation softened significantly in July-August largely due to base effect,” RBI Governor and MPC Chair Shaktikanta Das said while announcing the policy decisions.Recent uptick in food and metal prices if sustained can add to the upside risks on CPI inflation, Das said.
The prevailing and the expected inflation growth has led to changed in stance, the governor added.
The central bank now sees inflation for Q2, Q3 and Q4 of this fiscal year at 4.1%, 4.8%, and 4.2%, respectively. In the August policy, the monetary authority had pegged the inflation readings at 4.4%, 4.7% and 4.3%, respectively. Inflation stood at 4.9% in the first quarter.
The inflation forecast for the first quarter of the next fiscal year is projected at 4.3%.
The RBI has an inflation target of 4% (with a leeway of 2 percentage points on either side).
India’s retail inflation rate quickened to 3.65% in August as against a five-year low of 3.54% in the previous month, driven by the nagging food price rise. The headline inflation has stayed within the RBI’s tolerance range of 2-6 per cent. However, Das had said the target is to bring inflation to the 4% target ‘on a durable basis’.
While announcing the monetary policy in August, Das had warned the expected moderation in headline inflation during the fiscal second quarter on account of favourable base effects is likely to reverse in the third quarter.
Food prices in India
Food inflation which accounts for around half the overall CPI basket, accelerated to 5.66 per cent in August from a 13-month low of 5.42 per cent in the previous month.
Ample rains have damaged crops in states such as Maharashtra, pushing prices of key items such as onion and tomato higher. The inflation rate for vegetables grew 10.71 per cent in August as against 6.83 per cent in the previous month.
Monsoon season 2024 ends with 7.6% more rainfall than normal with Rajasthan, Gujarat, west Madhya Pradesh, Maharashtra, Telangana and Andhra Pradesh getting excess rainfall.
India’s inflation index is heavily influenced by food prices, as a significant portion of the population spends most of their income on food.
Experts had earlier indicated that a higher food inflation number could keep overall inflation from declining significantly.
Prices of key vegetables such as onion, tomato and potato have risen and a Crisil analysis recently showed the cost of a veg thali in India rose 11% on year in September.
Concerns also persist regarding the impact of weather variations on inflation and economic stability.
The RBI in its latest bulletin said volatility in food prices remains a contingent risk even as recent easing in retail prices will help boost private consumption.