Amid uncertainty over food and oil prices, know why India has kept policy rates stable

The Monetary Policy Committee (MPC) of the Reserve Bank of India has kept the policy rate at 6.5 percent for the sixth time and has not made any changes in it. The Monetary Policy Committee has also supported growth to ensure that the inflation target is met. The decision is considered prudent in view of the uncertainty over the food inflation outlook, oil price volatility amid geopolitical disruptions and resilient domestic growth. Inflation has also come down globally, but there is no possibility of central banks cutting rates in the short term.

Status quo on rates by global central banks

Global central banks have kept the policy rates steady in recent monetary policy meetings. However, it has also been accepted that after the increase in the year 2022, inflation has come down significantly. Even after this it remains above the target. As the US Federal Reserve indicated at its meeting in January, it has raised interest rates, but made it clear that it is not ready to start cutting. The Federal Reserve’s rate-setting panel, the Federal Open Market Committee (FOMC), said it would not be appropriate to lower the target rate until there is greater confidence that inflation is moving steadily toward the 2 percent target. The committee also indicated that a rate cut in March was unlikely.

The Bank of England’s MPC also decided to keep the policy rate unchanged at 5.25 percent by a majority of 6-3. Interestingly, there was disagreement on increasing as well as reducing the interest rate. Two members preferred to increase the policy rate by 0.25 percentage points to 5.5 percent. Whereas one member preferred to reduce the policy rate by 0.25 percentage points to 5 percent. Inflation in the UK has declined from a high of 11 per cent in October 2022 to 4 per cent in December 2023, but is still above target. Similarly, the European Central Bank (ECB) in its latest review of monetary policy decided to keep its key interests unchanged and keep rates unchanged for as long as necessary to bring inflation back to the 2 percent target.

Domestic inflation outlook still uncertain

The domestic inflation trajectory remains uncertain. After easing to 4.9 percent in October, inflation rose in November and December due to higher food prices. While sowing of rabi crops has improved and area under wheat and oilseeds is up by 0.7 per cent and 1.1 per cent respectively from last year’s levels, there is still considerable uncertainty over the food inflation trajectory due to adverse weather conditions. While the prices of vegetables are slightly lower due to seasonality, the prices of grains and pulses still remain high.

Recent disruptions on the geopolitical front also pose a risk of a rise in inflation. Even though non-food, non-oil inflation remains benign. Global crude oil prices have risen in recent weeks amid signs of strong US growth and Chinese stimulus boosting demand conditions. Oil prices have also risen due to America’s military attacks in the Middle East. These situations require constant monitoring of inflation. Inflation forecast for the current year has been kept unchanged at 5.4 percent. Assuming a normal monsoon next year, inflation is expected to come down to 4.5 percent.

Aggressive roadmap bodes well for conducting monetary policy

Increased public debt in advanced economies could weigh on global growth prospects. Gross debt to GDP is likely to exceed 100 percent in 2024, especially for advanced economies. In an environment of high interest rates, this could increase debt sustainability concerns, complicating the task by emerging as a new source of financial stress. India’s commitment to reduce its fiscal deficit to 5.1 percent of GDP next year and to 4.5 percent of GDP in fiscal year 2025-26 bodes well for debt reduction. In a scenario where the government is focusing on fiscal consolidation, monetary policy can focus on inflation management without worrying much about the expansion in demand induced by loose fiscal policy.