The Monetary Policy Committee (MPC) decided to maintain the policy rate at 22 percent. This decision takes into account the latest inflation out turn reflecting the continuing declining trend in inflation from its peak of 38 percent in May to 27.4 percent in August 2023.
Even though global oil prices have risen recently and are being passed on to consumers through adjustment in administered energy prices, inflation is projected to remain on the downward trajectory, especially from the second half of this year.
As such, real interest rates continue to remain in positive territory on a forward-looking basis. Moreover, the expected ease in supply constraints owing to better agriculture output and the recent administrative measures against speculative activity in the FX and commodity markets would also support the inflation outlook.
The MPC noted four key developments since its July meeting. First, agriculture outlook has improved, based on the latest data on cotton arrivals, better input conditions, and satellite data indicating healthy vegetation of other crops. Second, global oil prices have been rising and are now hovering over $90/barrel level. Third, as anticipated, the current account posted a deficit in July after remaining in surplus for the last four months, partly reflecting the impact of the recent ease in import restrictions. Finally, recent administrative and regulatory measures aimed at improving availability of essential food commodities and curbing illegal activities in the foreign exchange market have begun to yield results. This has helped in narrowing the gap between the Interbank and open market exchange rates.
The MPC noted that it will continue to monitor the risks to the inflation outlook and, if required, it will take appropriate action to achieve the objective of price stability. At the same time, the MPC also stressed on maintaining a prudent fiscal stance to keep aggregate demand in check. This is necessary to bring inflation down on a sustainable basis and to achieve the medium-term target of 5 – 7 percent by end-FY 25.
National CPI inflation decelerated to 27.4 percent in August on y/y basis from 28.3 percent in July, with moderation in food inflation. However, the decline in inflation was lower than anticipated largely due to the surge in global oil prices and their pass-through to administered energy prices. Also, as per latest surveys, near-term inflation expectations of both consumers and businesses have reversed from their earlier declining trend.
The Committee noted that these results partly reflect the impact of heightened uncertainty in the FX markets – particularly in the open market – at the time these surveys were conducted. In this context, the MPC noted the recent regulatory and law-enforcement measures will help address supply constraints in commodity and illegal activity in FX markets. These developments – along with improved agriculture outlook and tight monetary policy stance – will help ensure that inflation remains on the downward trajectory, especially from the second half of this year. The MPC also noted that inflation is likely to increase significantly in September mainly due to base effect and the adjustment in energy prices. It is expected that inflation will subsequently decline in October and maintain its downward trajectory from thereon.
