A calculated pause

To maintain the pace of growth, it is important not to further increase the repo rate. Therefore, in the monetary review concluded on October 6, the Reserve Bank maintained the repo rate at 6.5 per cent for the fourth consecutive time. Earlier, the Reserve Bank had increased the repo rate to 6.5 per cent in the monetary review of February 2023. The repo rate was increased by 2.50 per cent in six times between May 2022 and February 2023 due to factors such as inflation, global geopolitical crises, and the high price of crude oil in the international market. However, except for inflation, the impact of other factors on growth has diminished significantly. Nevertheless, an escalation in the conflict between Israel and Hamas may pose additional challenges. Therefore, the Reserve Bank aims to implement various measures to accelerate the growth rate. In the recent monetary review, all members of the Monetary Policy Committee (MPC) unanimously voted in favour of keeping the repo rate unchanged.

By keeping the repo rate unchanged, the Reserve Bank ensures that the loan instalments of existing borrowers do not increase, and businesses and the public can access loans at more affordable rates. Fluctuations in the repo rate typically lead to changes in loan instalments, whereas a constant repo rate generally keeps the loan rate stable.

The Reserve Bank uses repo rate adjustments as a tool to combat inflation. When the repo rate is high, banks acquire loans from the Reserve Bank at higher interest rates, causing them to lend to customers at elevated rates. This reduces the liquidity of currency in the economy, leading to decreased consumer demand due to reduced disposable income, and subsequently, a decline in the sales of goods and products, contributing to lower inflation. Conversely, when the economy is weak, efforts are made to boost the liquidity of currency in the market to stimulate development. This is achieved by reducing the repo rate so that banks can access loans from the Reserve Bank at more favourable interest rates and subsequently offer customers loans at lower interest rates.

In the monetary review, the Reserve Bank Governor also presented inflation and gross domestic product (GDP) estimates. According to the central bank, inflation for the financial year 2024 may reach 5.4 per cent, slightly higher than the Reserve Bank's previous estimate of 5.1 per cent. The Reserve Bank has projected that real GDP will grow at a rate of 6.5 per cent in fiscal year 2024 and 6.6 per cent in fiscal year 2025. This aligns with their earlier prediction for the financial years 2024 and 2025.

RBI Governor Shaktikanta Das has emphasised that the battle against inflation will persist due to the ongoing high inflation rate. The Central Bank has set a target to maintain inflation at 4 per cent, with a tolerance range of 2 per cent to 6 per cent. However, achieving this target will depend on various factors, including weather patterns and international influences such as global geopolitical crises and crude oil prices in the international market. The Reserve Bank faces a challenging task in meeting this goal, especially considering the persistently high inflation rates for many food items.

Retail inflation came down to 6.83 per cent in August from 7.44 per cent in July. Furthermore, due to lower vegetable prices in September, retail inflation dropped to 5.02 per cent, falling within the upper limit of the 6 per cent tolerance range set by the Reserve Bank. In September, rural areas experienced an inflation rate of 5.33 per cent. Despite the overall decline in retail inflation, several food items witnessed an increase in inflation rates. Notably, the inflation rate for sugar rose to 4.52 per cent, up from 3.8 per cent in August, while the inflation rate for pulses increased to 16.38 per cent from 13.04 per cent in the previous month. In September, the inflation rate for spices exceeded 23 per cent. Despite government efforts to control wheat prices, they continued to rise, with an inflation rate exceeding 4 per cent in October. Rice prices also increased by 22 per cent in one year, and the inflation rate for grains hovered around 11 per cent. Additionally, the inflation rate for fruits was recorded at 7.30 per cent.

Retail inflation in Rajasthan was the highest in the country at 6.53 per cent, while Haryana was at second place with 6.49 per cent and Karnataka was at third place with 6 per cent.

There has also been an improvement in the industrial production rate in August. For this month, the rate stood at 10.3 per cent, a substantial increase from July's 6 per cent and June's 3.7 per cent. This surge in the industrial production rate reflects an upswing in both demand and supply, indicating a mounting economic activity.

Contrary to retail inflation, wholesale inflation reached a negative -0.52 per cent in August, compared to 1.36 per cent in July. This marks the fifth consecutive month in which wholesale inflation has remained negative, below zero. Key factors contributing to the gap between retail and wholesale inflation include transportation expenses, urban location, city size, and the international fuel market. Therefore, the government can reduce the difference between wholesale and retail inflation through its machinery.

Inflation is directly linked to purchasing power. For instance, with a 7 per cent inflation rate, Rs 100 earned would be worth only Rs 93. It's essential for individuals to make investments with inflation in mind to prevent the erosion of their money's value. Therefore, controlling inflation is crucial to maintaining a steady pace of growth.

Inflation has been persistently high in recent months, impeding development. In response, the Reserve Bank has opted to keep the repo rate unchanged. If the Reserve Bank were to raise the repo rate to curb inflation, it might indeed reduce inflation, but it would also dampen the growth rate. Therefore, the Reserve Bank's approach aims to strike a balance between inflation and growth, ensuring a robust Indian economy and minimising hardships for the general public and business community.

Views expressed are personal