Context
RBI has restored its credibility by emphasising its determination to bring down inflation closer to 4% and focus on macroeconomic stability
Issue: RBI keeps the repo rate unchanged in the 6th Bimonthly policy review
Right decision
As per author, RBI, emphasizing its determination to bring down inflation closer to 4% on a durable basis and focus on macroeconomic stability, has restored its credibility, which many felt the Indian central bank was losing
Backdrop
Since January 2015, the RBI has cut its policy rate by 175 basis points to 6.25%.
Ground for a rate cut
Author states that the biggest push for yet another rate cut at this point has been a sharp drop in retail inflation. It dropped to 3.41% in December from 3.63% in the previous month—its lowest since November 2014
Why RBI stuck to the previous policy rate?
- Deflation: The drop in inflation has been primarily driven by deflation in the prices of vegetables and pulses and excluding food and fuel, inflation remained at 4.9% for four months at a stretch, since September
- Crude prices: Among others, a rise in international crude prices has contributed to this. The MPC did not want to take any chances
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