As expected, the Reserve Bank of India-led Monetary Policy Committee (MPC) has kept the policy repo rate unchanged at 6.5 per cent. The policy stance continues to be the withdrawal of accommodation, which means the rate of interest will remain elevated to keep inflationary expectations in check. Though the country’s economic growth continued to be resilient, the central bank flagged rising consumption-focused loan portfolio and growth in alternative investments.
Retail inflation rose to 5.1 per cent in June 2024, owing to higher-than-expected food inflation. Food items together have a weight of around 46 per cent in consumer price index based inflation and have contributed to 75 per cent of the retail inflation in June.
As food takes away more than 50 per cent of a poor family’s income in India, the RBI under the Narendra Modi era has been rightly focusing its attention on keeping the inflation in control without running after higher economic growth. However, the government should also take note that monetary policy cannot address food shortages. In spite of India’s tremendous strides in technology and farming, it is a matter of shame that the country has not been able to fix the issue of vegetable prices that have contributed to 35 per cent of the retail inflation in June.
While the RBI continues to expect a 7.2 per cent growth for the current financial year, it admitted that certain high frequency indicators showed lower than anticipated corporate profitability, general government expenditure and core industries output. However, on the positive side, manufacturing activity continues to pick up on the back of improving domestic demand, while the services sector remains buoyant. Private corporate investment is gaining steam on the back of expansion in bank credit. The spillovers from protracted geopolitical tensions, volatility in international financial markets and geoeconomic fragmentation, however, pose risks on the downside.
