The Reserve Bank of India’s monetary policy committee (MPC) kept the repo rate unchanged at 6.5% in its third policy statement of the financial year 2023-24.

The MPC maintained the status quo on the key policy rate for the third consecutive time. The rate-setting panel paused the rate hike in April this year. The repo rate was left unchanged in June. The key policy rate at which the central bank lends to the banks was last increased in February by 25 basis points (bps).

The MPC’s policy stance remains focussed on "withdrawal of accommodation" to ensure that inflation aligns with the target of 4% while supporting growth. Five out of six MPC members supported this stance.

This comes at a time when retail inflation has spiked due to higher food and vegetable prices. The Consumer Price Index (CPI) inflation rose to 4.8% in June from 4.31% in May as an uneven monsoon damaged some crops, causing food prices to increase.

The MPC further raised its retail inflation forecast for the financial year 2023-24 to 5.4% from 5.1% earlier. The CPI inflation forecast for the July-September quarter has been raised to 6.2% from 5.2%. The inflation projection for October-December has been raised to 5.7% from 5.4%. The inflation forecast for January-March 2024 has been retained at 5.2%.

"Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory. This jump is, however, likely to correct with fresh market arrivals. There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring," the MPC notes.

The month of July has witnessed accentuation of food inflation, primarily on account of vegetables. The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near term, says RBI governor Shaktikanta Das.

El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far, Das adds.

The MPC retained its GDP growth forecast for FY24 at 6.5%. GDP growth forecast for April-June 2023 retained at 8%. GDP growth forecast for July-September 2023 retained at 6.5%. GDP growth forecast for October-December 2023 retained at 6%. GDP growth forecast for January-March 2024 retained at 5.7%.

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