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If you had paid attention in school, you would know what weight is: physics defines it as the measurable heaviness of body mass. But weight has many meanings, just like every English word and if you are a keyboard-clacking newsletter writer, you would know that weight also means influence and it also pertains to measurable impact in economics.

Weight was at the centre of the Reserve Bank of India’s monetary policy today and the reason that the RBI chose to stick with status quo on rates and stance. “First and foremost is the fact that our target is headline inflation wherein food inflation has a weight of about 46 percent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored,” Governor Shaktikanta Das said in his statement. Das went on to explain how food influences household inflation perceptions and that the central bank cannot lower its guard on inflation just because core inflation is easing. “The public at large understands inflation more in terms of food inflation than the other components of headline inflation,” Das added. In other words, we are greatly influenced by how much we spend to eat.

While there has been an enduring debate of whether monetary policy should even consider food inflation (the Economic Survey made a case of changing the policy target to core inflation instead of headline inflation), Das’s premise of including food is prudent.

The job of a central bank is to manage expectations since expectations influence and fuel asset prices. Therefore, monetary policy prescriptions should be targeted at expectations, irrespective of whether expectations are fuelled by vegetables or haircuts. The Monetary Policy Committee (MPC), notwithstanding dissenting members, has kept headline inflation as its target and attempts to discount food prices have not been on the table. Indeed, the RBI’s household inflation expectations survey shows that expectations have inched up because of food.

If you need more convincing, please read my colleague Dinesh Unnikrishnan’s detailed analysis of today’s policy where he explains why Das played it safe and kept both rates and stance unchanged.

Unless the RBI changes its approach towards food inflation, rate cuts would be difficult to come by. That said, the Governor has pointed out that food inflation will ease, thanks to normal monsoon and a base effect. Therefore, markets need not lose hope just yet. Of course, the markets will need to look at newer challenges here like climate change and even the RBI would need to do the same.

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For now, economists are hoping that the MPC indicates a pivot on the stance at the next policy meeting in October. The chances of that are dim because the composition of MPC would change with the current external members exiting after their stipulated four-year tenure. Newer members tend to stick with the RBI members on policy decisions, at least in the first few meetings, since the analysis, data and empirical contributions primarily come from the central bank. The weight of the RBI members on the MPC outcome is likely to be more in the first few meetings.

Today’s meeting saw two members dissent and vote for 25 basis points cut in the repo rate. Both Ashima Goyal and Jayanth Varma have been arguing that policy is far tighter than it should be. But Das and his deputies have not ceded ground. In fact, Deputy Governor Michael Patra said in the press meet that policy rates are just about at the right level. That is because India’s potential growth rate has increased which enables the RBI to sacrifice less growth in its fight for inflation. In other words, the impact of elevated policy rates in bringing down inflation would be greater than on growth.

The upshot is that there is very little motivation for the RBI to cut rates this year. The RBI has a sanguine outlook on growth despite global volatility and the recent meltdown in equity markets and carry trade pain. Even here, Das sounded optimistic, citing the relative resilience of India’s external sector and its colossal stock of forex reserves.

Das has only one message: Keep calm and carry on.

One market that is taking Das’s message to heart is bonds. Yields hardly moved today and may even drift downwards in the coming days. Read here the detailed analysis by Neha Dave from our Research team. 
Investing insights from our research team

VIP Industries: Can investors ride on the early green shoots?

Hindalco: Tepid performance from Novelis in Q1 FY25

EIH: Weak Q1, but strong growth outlook

Godrej Consumer: Decent growth runway, but valuation captures potential

Blue Star Q1: Heat waves fuel unprecedented demand surge

Cummins India: Domestic market to drive growth as exports continue to be challenging

Sagar Cements – Competitive pressures looming

Syngene: Strong play on ‘China Switches’ in the CRAMS space

What else are we reading?

Chart of the Day: Monetary Policy Committee has a rich history of dissent, but no split

India’s steel producers are caught between China and a hard place

Digital risks imperil banking even as technology makes it convenient to bank

With Renom, Suzlon takes pole position in wind energy services market

With SaaS industry at a crossroads, how are companies coping?

Which came first—yen carry trade unwinding or equity selloff?
(republished from the FT)

Bangladesh isn’t getting its happy ending with Sheikh Hasina’s downfall

India's Arbitration Reform: Enhancing neutrality and global standing

One hundred grams of solitude: Vinesh Phogat’s Olympic twist of fate

UK Riots: Elon Musk’s X drove lies right through a UK loophole

Market Turmoil: S&P always looks good next to European stocks

Climate Calamity: Unchecked development, ignored warnings trigger environmental catastrophe

Personal Finance

RBI interest rate status quo at 6.5%: Invest in long-term debt mutual funds, say experts

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Technical Picks: SAIL, SAIL, DLF and Piramal Enterprises (These are published every trading day before markets open and can be read on the app).

Aparna Iyer
Moneycontrol Pro