The retail inflation data for the month of October has created new challenges for the Reserve Bank of India (RBI). Retail inflation based on Consumer Price Index (CPI) has reached 6.21 percent, which is the highest level in the last 14 months. This figure is outside the RBI’s target range of 2-6 percent, due to which the pressure on RBI to control inflation has increased further. In such a situation, the question is arising whether RBI can take a decision to reduce interest rates in the next Monetary Committee meeting?
The meeting is to be held in December
The next meeting of the Monetary Policy Committee (MPC) of RBI is to be held in December, in which the decision on policy interest rates will be taken. Earlier, experts and the market had expected a cut in interest rates in December, so that the weakening economy could be given relief. But, this possibility has suffered a setback after inflation reached high levels.
Inflation increases RBI’s tension
The rise in retail inflation in October was not only unexpected, but it has also become a big headache for the RBI. Globally, interest rate cuts are continuing in America, Europe, China, and other developed economies. America and European Central Bank have reduced interest rates several times this year. On the contrary, due to increasing inflation rate in India, the possibility of cutting interest rates has become weak.
This is the challenge before the Governor
RBI Governor Shaktikanta Das has already clarified that the primary goal of the central bank is to keep inflation under control. When the inflation rate exceeds 6 percent, RBI usually takes the step of increasing interest rates. This reduces cash flow in the market and curbs demand, which helps in reducing inflation.
The economy is already facing slowdown amid rising inflation. The automobile sector is struggling with a decline in sales, while the financial results of FMCG companies indicate a decline in consumption. The declining trend in the stock market also continues. In such a situation, a need was felt to cut interest rates, so that cash flow in the market increases and demand is encouraged.
RBI can take this decision
There is a high possibility of RBI maintaining status quo on interest rates in the December meeting. To bring inflation under control, the central bank may choose to increase interest rates, but this may have a negative impact on the economy. Experts believe that RBI can maintain the existing rates for now, as has happened in the last 10 times.
