Why hasn’t RBI cut policy rates despite its lack of control over food inflation?
Subscribe to enjoy similar stories. With a 8% fall in stock prices from their peak on 26 September, those who make money from the business of selling stocks seem to be getting jittery. Foreign institutional investors pulled out ₹94,017 crore or $11.2 billion in October.
The expected future earnings growth of companies is being downgraded. And the commentary being provided by the managements of consumer-oriented companies isn’t good. Not surprisingly, calls for the Reserve Bank of India (RBI) to cut the repo rate, or the interest rate at which it lends to banks, are growing stronger.
Once RBI cuts the repo rate, the hope is that banks will cut the interest rates at which they lend, people and businesses will borrow more and spend more, and this in turn will help the earnings of companies grow faster, thus ensuring that stock prices continue to rise at the rapid pace they have over the last few years. Now, simplistic ideas may make for great elevator pitches, but they leave out a lot of inconvenient detail. In September, inflation, as measured by the consumer price index (CPI), was 5.5%, primarily driven by higher food prices; food inflation was 9.2%.
Food items have a weightage of a little over 39% in the items that constitute the CPI. In 2024-25 so far, food inflation has averaged 7.8%, while retail inflation has averaged 4.6%. RBI cannot control food inflation.
So, the argument is that it might as well cut the repo rate, which has been at 6.5% since February 2023. Of course, RBI knows that it cannot control food inflation. So, why is it not easing its policy? First, RBI can control the non-food part of inflation.
Read more on livemint.com
