RBI Keeps Rates Unchanged Amid Rising Food Prices
Bank of Baroda Report Highlights Concerns
The Reserve Bank of India (RBI) has decided to keep key policy rates unchanged due to rising food prices, especially vegetables. This decision means that a rate cut is unlikely before December 2024. The Bank of Baroda (BOB) report also warns that if inflation continues, the rate cut could be delayed even further.
The Monetary Policy Committee (MPC) voted 4-2 to maintain the current policy stance. Dr. Ashima Goyal and Professor Jayanth R Varma voted for a rate cut, showing a push for monetary easing within the committee. Professor Varma has been advocating for a rate reduction since February 2024.
The RBI Governor emphasized the impact of high food prices on overall inflation. The RBI kept its GDP growth projection for FY25 at 7.2%, but slightly lowered the Q1 FY25 growth forecast to 7.1% due to lower corporate profitability and reduced government spending.
Corporate profits have dropped significantly, with growth falling to 0.6% in Q1 FY25 from 47.9% in Q1 FY24. Despite these challenges, the RBI remains optimistic about economic growth, expecting increases in private spending, a normal monsoon season, and strong services activity. However, high food inflation could affect rural demand recovery.
The RBI kept its FY25 inflation projection at 4.5%, with upward revisions for Q2 FY25 and Q3 FY25 to 5.0% and 4.6%, respectively. The Q4 FY25 projection was slightly lowered to 4.3%. The high base from the previous year indicates persistent inflationary pressures.
The RBI Governor also addressed financial system stability, highlighting concerns about Scheduled Commercial Banks (SCBs) relying on non-deposit instruments to meet credit demand. The RBI recommended innovative instruments to attract retail deposits and flagged the rapid growth in credit card loans and top-up housing loans as risks needing stricter oversight.
The RBI announced regulatory measures to strengthen the digital payment ecosystem, including enhanced supervision of digital lending apps, increased reporting for Credit Information Companies (CICs), and raising the limit for UPI-based tax payments to Rs 5 lakh. A continuous clearing system for cheques will expedite transaction processing.
The market response to the RBI’s decision was muted. The 10-year Government Security (G-sec) yield increased by 1 basis point, and the Indian Rupee (INR) declined by approximately 2 paise. The Sensex fell by 0.2%, influenced by the Governor’s warnings about potential banking sector risks.
The RBI’s approach mirrors trends in other major global central banks, balancing inflation control and economic growth. The RBI Governor noted that future policy directions will be influenced by domestic economic conditions rather than other central banks’ actions.
Doubts Revealed
RBI -: RBI stands for Reserve Bank of India. It is the central bank of India, which means it controls the money supply and interest rates in the country.
Rates Unchanged -: When the RBI keeps rates unchanged, it means they are not changing the interest rates that banks use to lend money. This can affect how much people pay for loans.
Food Prices -: Food prices refer to how much money people have to pay to buy food. If food prices go up, it means food is becoming more expensive.
Bank of Baroda -: Bank of Baroda is one of the largest banks in India. It provides various financial services like loans, savings accounts, and more.
Inflation -: Inflation is when the prices of goods and services go up over time. This means you need more money to buy the same things.
Monetary Policy Committee (MPC) -: The Monetary Policy Committee is a group of people in the RBI who decide on the interest rates and other policies to control inflation and support economic growth.
RBI Governor -: The RBI Governor is the head of the Reserve Bank of India. This person makes important decisions about the country’s money and banking system.
Digital Payment Ecosystem -: The digital payment ecosystem includes all the ways people can pay for things using technology, like mobile apps, online banking, and digital wallets.