Monetary policy stance: RBI likely to remain in lower for longer mode

THE INTRODUCTION OF the new inflation index has more data points but lack context needed for proper interpretation, said economists.

- FE BUREAU

But the larger question is whether the Reserve Bank of India (RBI) will maintain its pro-growth stance when the real rate falls below the neutral range, typically considered to be 1.4% to 1.9%.

“With the new CPI pushing inflation closer to 5%, it’s becoming increasingly difficult for the RBI to maintain a pro-growth stance; a prolonged pause looks likely, but if inflation stays elevated, a rate hike cannot be ruled out, especially since India’s real growth challenges are structural and cannot be fixed by monetary easing alone,” said Dhanajay Sinha, CEO, Systematix Group.

His concerns are the stagnant real wages, modest corporate revenue growth, margin pressures, rising input costs, and a weaker rupee will limit the RBI’s ability to revive growth, and the new inflation dynamics may constrain its pro-growth stance.

Most economists expect a long pause in the RBI's rate policy.