Amidst the macroeconomic discourse, Reserve Bank of India Governor Shaktikanta Das has shed light on the nuances of monetary policy and the pursuit of economic stability. In his recent statement, Governor Das highlighted the potential for retail inflation to fall below the 4% mark in the second quarter, simultaneously reaffirming the central bank’s commitment to price stability as its linchpin objective. “The success in the disinflation process so far should not distract us from the vulnerability of the inflation trajectory to the frequent incidence of supply side shocks,” he elucidated, stressing the importance of price stability as a precursor to securing sustained high economic growth.
The instances of fluctuating inflation are a reminder of the RBI’s careful dance with price levels. Forecasting a retail inflation rate of 4.5% for the fiscal year 2024-25, Governor Das has provided a quarterly breakdown with a slight peak in Q1 at 4.9%, a subsequent decline to 3.8% in Q2, rising slightly in Q3 and stabilizing again at 4.5% in the final quarter.
Within the framework of the government-mandated target, the RBI steers the economy, required to keep retail inflation at the 4% median, allowing a deviation range of +/- 2%. “It is essential, in the best interest of the economy, that retail inflation continues to moderate and aligns with the target on a durable basis. Till this is achieved, our task remains unfinished,” asserted Governor Das, signaling the RBI’s unwavering focus until the target is consistently met.
Reflecting on recent trends, Governor Das noted a more favorable growth-inflation dynamic since the last policy review, with headline inflation cooling off to 5.1% during the first months of 2024 from a higher rate of 5.7% in December 2023. Core inflation, stripping out the volatile food and energy prices, has been steadily declining for nine months to its lowest recorded level. Encouragingly, for half a year, the fuel component of the consumer price index has stayed in a state of deflation. On the other hand, food inflation presents challenges, having escalated in February.
Governor Das emphasized that robust growth prospects offer leeway for policy emphasis on inflation moderation to meet the 4% target. Despite the optimism, the uncertainty of food prices suggests vigilance against inflationary surges that might destabilize the disinflation path.
Against this backdrop, the monetary policy must remain decisively disinflationary. This approach is crucial to ensure that inflation expectations among the public are firmly anchored, allowing the full effect of past monetary measures to permeate the economy. Consequently, the Monetary Policy Committee (MPC) has resolved to hold the policy rate at 6.50 percent and persist in its strategy of withdrawing accommodation. “The MPC will remain resolute in its commitment to aligning inflation to the target,” Governor Das reaffirmed.
Market analysts are anticipating a rate cut by the RBI once retail inflation settles below the pivotal 4% level. “The timing and extent of rate cuts remain dependent on announcement by global central banks and the retail inflation aligning with the RBI’s 4% target on a sustained basis,” opined Raghvendra Nath, Managing Director of Ladderup Wealth Management.
Governor Das concluded with a candid assessment that, although inflation has significantly moderated, it continues to hover above the desired 4% goal. Notably, the volatility in food prices poses a significant challenge to the ongoing disinflation process. He warned that persistent food inflation could disrupt the current anchoring of households’ inflation expectations.
“Our ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations,” Governor Das emphasized. The commitment to achieve price stability symbolizes the RBI’s laser focus on laying the foundation for continuous high growth, confirming that the central bank’s arduous journey towards its inflation target is far from over.
