RBI bulletin highlights policy rate impact on inflation

RBI bulletin: It added that this policy rate tightening may lower aggregate demand and headline inflation by 160 bps each until Q2 of 2024-25.

The Reserve Bank of India (RBI), in its latest monthly RBI bulletin released on October 21, highlighted that policy rate tightening could help anchor inflation expectations by reducing both aggregate demand and headline inflation by 160 basis points (bps) each, till the second quarter of 2024-25.

Monetary Policy Transmission in India

In the article titled Monetary Policy Transmission in India: The Recent Experience, authored by Michael Debabrata Patra, Indranil Bhattacharyya, Joice John, and Avnish Kumar, the RBI analyzed the macroeconomic impact of its monetary policy decisions.

According to the article, the 250 bps increase in the repo rate since May 2022 has already contributed to the reduction in demand and inflation.

The study found that monetary policy shocks had a noticeable effect on several financial market segments, particularly on money markets, government securities, and corporate bond markets, though the foreign exchange (forex) and stock markets were relatively less impacted.

The article notes, however, that these findings are part of an independent analysis and do not represent the official stance of the central bank.

Neutral Stance Amidst US Federal Reserve Rate Cuts

During its monetary policy meeting on October 9, the Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 6.5%, shifting its stance to neutral from the earlier approach of “withdrawal of accommodation.”

This policy change comes in the context of the US Federal Reserve opting for a significant 50 bps rate cut, highlighting diverging monetary policy directions between the two nations.

The RBI’s outlook suggests that despite maintaining the current rate, its previous tightening measures are expected to continue influencing inflation and aggregate demand through various transmission channels, ensuring price stability over the coming quarters.