Monetary Policy and Inflation Dynamics in India (2023-2025)
RBI's Repo Rate Policy
Between February 2023 and February 2025, the Reserve Bank of India (RBI) maintained its key short-term 'repo' lending rate for banks at 6.5%. This period saw different inflation dynamics:
- Consumer Price Index (CPI): Averaged 5.2% year-on-year.
- Consumer Food Price Index (CFPI): Higher at 7.6%.
- Core Inflation: Excluding food and fuel, was only 4.1%.
Food and Fuel Inflation
Food and fuel inflation are driven by supply-side factors such as weather and geopolitical developments. These factors are volatile and not effectively addressed by monetary policy.
Pressure on RBI for Rate Cuts
There was pressure on the RBI to cut interest rates, with Union Commerce and Industry Minister Piyush Goyal criticizing the consideration of food inflation in rate decisions. By June 2024, core inflation had dropped to 3.1%, yet the anticipated rate easing was delayed.
Recent Inflation Trends
In April 2025, CFPI inflation reached a low of 1.8%, below the headline inflation of 3.2% and the core inflation of 4.2%. This reversed the earlier trend where food prices were higher than general and core inflation rates.
Impact of Supply-Side Shocks
- Russia-Ukraine Conflict: Triggered agri-commodity price spikes.
- El Niño 2023-24: Led to reduced rainfall and lower crop production.
Agricultural and Economic Outlook
Following the end of El Niño, agricultural prospects improved. Above-average monsoons and a mild La Niña facilitated a turnaround in agriculture, leading to reduced food inflation pressures. The FAO food price index decreased to 128.3 points in April, and oil prices fell, further easing inflation concerns.
Financial and Currency Developments
- Exchange Rate Stability: The rupee stabilized around 85.5 to the dollar after significant fluctuations.
- Foreign Portfolio Investment (FPI): Initially saw withdrawals, but recent weeks have shown net purchases.
- Imports and Trade: Anti-dumping duties and cheaper imports from China and Vietnam have helped stabilize core inflation.
Conclusion
The confluence of stable rupee, soft global commodity prices, improved domestic food supply, and strategic import duties positions the RBI favorably for potential rate cuts without significant inflationary worry.