MPC meeting: How has inflation behaved since RBI hiked repo rate last year

The expectations for the RBI panel to begin cutting interest rates soon are there, however, the exact timing remains uncertain

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is holding its second meeting for the financial year 2024-25 (FY25) from June 5 to 7. Market analysts predict that the RBI will keep the repo rate steady at 6.5 per cent, as food inflation still remains a concern.

The repo rate is the rate at which the RBI lends to commercial banks.

A Bloomberg poll indicated that economists foresee the central bank maintaining this rate for the eighth consecutive time.

Despite expectations for the RBI MPC to begin cutting interest rates soon, the exact timing remains uncertain. The MPC’s decision from the upcoming meeting will be announced on June 7.

But what is the situation on the inflation front?

Headline retail inflation stayed largely unchanged at 4.83 per cent in April, down from 4.85 per cent in March.

But the food inflation increased to 8.7 per cent in April 2024, from 8.52 in March. Fruits experienced a significant month-on-month (MoM) increase of 6.2 per cent, the highest among food categories, while vegetables rose by 1.3 per cent MoM, reflecting reduced availability during the intense summer months.

However, core CPI inflation (excluding food and fuel components) remained virtually unchanged at 3.4 per cent in April 2024, providing some relief.

Year-on-year inflation in the miscellaneous segment remained unchanged at 3.5 per cent in April 2024 compared to the previous month.

In the previous meeting, the RBI MPC kept the repo rate unchanged for the seventh consecutive time at 6.5 per cent. The monetary policy stance continues to be one of ‘withdrawal of accommodation’, with five out of six members favouring the decision.

The rate hike cycle paused in April last year after six consecutive increases totalling 250 basis points since May 2022. The RBI last raised the repo rate to 6.5 per cent in February 2023.

In FY24, and now 2 months into FY25, food inflation has remained a cause for concern for the RBI. It has been sticky, hovering between 8-10 per cent.

On the growth front, India’s gross domestic product (GDP) grew by 7.8 per cent year-on-year during the January-March 2024 quarter (Q4 FY24), up from 6.2 per cent growth in the same period a year ago, surpassing analysts' expectations.

For the entire financial year 2023-24, India’s GDP growth rate reached 8.2 per cent, compared to 7 per cent in FY23, as per an official statement.

The repo rate is the rate at which commercial banks borrow money by selling their securities to the Reserve Bank of India (RBI) to maintain liquidity during a shortage of funds or due to statutory measures. It is a primary tool used by the RBI to control inflation.

Technically, repo stands for 'Repurchasing Option' or 'Repurchase Agreement'. In this agreement, banks provide eligible securities such as Treasury Bills to the RBI in exchange for overnight loans, with an agreement to repurchase them at a predetermined price. This allows banks to access cash while the central bank holds the securities.