Das underlines priority: Price stability key for high growth

Analysts expect the RBI to cut the repo rate when retail inflation comes below the four per cent level.

RBI Governor Shaktikant Das

While indicating the possibility of retail inflation dipping below 4% in the second quarter, Reserve Bank of India Governor Shaktakanta Das Friday underlined that ensuring price stability remains the central bank’s priority. “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 said after unveiling the monetary policy. “Our effort is to ensure price stability on an enduring basis, paving the way for a sustained period of high growth.”

The RBI has projected a retail inflation of 4.5 per cent in fiscal 2024-25. It has projected an inflation of 4.9% in Q1, 3.8% in Q2, 4.6% in Q3 and 4.5% in Q4 of fiscal year 2024-25.
The government has mandated the RBI to keep retail inflation at 4% with a band of +/- 2%.

“It is essential, in the best interest of the economy, that retail inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished,” Das said.

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The central bank chief said that growth-inflation dynamics have played out favourably since the last policy. Headline inflation has eased to 5.1 per cent during January and February 2024 from 5.7 per cent in December 2023, with core inflation declining steadily over the past nine months to its lowest level in the series. The fuel component of the consumer price index remained in deflation for six consecutive months. Food inflation pressures, however, accentuated in February, he said.

Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4%, Das said. “As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation,” he said.

Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions. “The MPC, therefore, decided to keep the policy rate unchanged at 6.50 per cent in this meeting and remain focused on withdrawal of accommodation. The MPC will remain resolute in its commitment to aligning inflation to the target,” he said.

Analysts expect the RBI to cut the repo rate when retail inflation comes below the four per cent 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,” said Raghvendra Nath, Managing Director, Ladderup Wealth Management.

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According to the RBI Governor, inflation has come down significantly but remains above the 4 per cent target. “Food inflation continues to exhibit considerable volatility impeding the ongoing disinflation process. High and persistent food inflation could unhinge the anchoring of inflation expectations which is underway,” said Das.
“Our ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations,” he said.