RBI’s Monetary Tightening Curbs Inflation

The Reserve Bank of India (RBI)’s consistent increase in the policy rate by a total of 2.5% since May 2022 has helped bring inflation down by 1.60%, according to a report released by senior RBI officials on Monday. The article, authored by Deputy Governor Debabrata Patra and economists Indranil Bhattacharya, Joice John, and Avneesh Kumar, highlights that the current policy rate stands at 6.5%, with no rate hikes since February 2023. The Monetary Policy Committee (MPC) in its October 2024 meeting decided to keep rates unchanged for the 10th consecutive time but adopted a neutral stance, hinting that rate cuts may occur in future meetings.

How RBI Curbed Inflation

The report explains that the RBI’s monetary tightening helped stabilize inflation and control overall demand, which led to disinflationary effects. Although the report reflects the authors’ views and not necessarily the RBI’s official stance, it outlines how the policy changes have had a greater impact on short-term interest rates than long-term ones. Since the rate hikes began in May 2022, inflation has seen a reduction of 1.6%, indicating the effectiveness of RBI’s measures.

Inflation Below 4% in July and August

In July and August 2023, inflation remained below 4%, with retail inflation at 3.54% in July, a five-year low, and 3.65% in August. However, inflation surged to 5.49% in September, largely due to rising food prices. Experts believe food inflation was the driving factor behind the sudden spike. The RBI projects inflation to stabilize at 4.5% for the current fiscal year.

Will RBI Cut Rates in December?

While the MPC maintained the policy rate in October, the shift to a neutral stance raises questions about whether a rate cut could be expected in December. Analysts suggest that the inflation figures for October and November will determine the MPC’s decision. Some economists predict that the RBI may opt for a rate cut in its February or April meetings next year, depending on the inflation trajectory.

RBI Chooses an Independent Path, Not Following the US and Europe

Unlike the European Central Bank, which has already cut rates three times, and the US Federal Reserve, which recently slashed rates by 50 basis points with more cuts expected, the RBI has held steady. Governor Shaktikanta Das emphasized that India’s monetary policy need not follow global trends,