RBI targets inflation at 4% for sustainable economic growth

“In contrast, the deflation in consumer price index (CPI) fuel deepened and core inflation (CPI inflation excluding food and fuel) moderated to a four-year low of 3.8 per cent in December,” he said. The decline in core inflation continued to be broad-based with inflation remaining steady or softening across its constituent groups and sub-groups.

The medium-term target for CPI inflation is 4 per cent within a band of plus or minus 2 per cent, the Monetary Policy Committee  (MPC) said.

Retail inflation surged to a four-month high of 5.69 per cent in December driven by higher prices of food items such as pulses, spices, fruits and vegetables, data released by the National Statistical Office (NSO) showed.

Headline inflation has remained high and has seen considerable volatility, moving in a range of 4.3 per cent to 7.4 per cent during the current financial year. “Recurring food price shocks could interrupt the ongoing disinflation process, with risks that it could lead to de-anchoring of inflation expectations and generalisation of price pressures. Adding to these are the renewed flash points on the geo-political front, including supply chain disruptions. Importantly, the CPI inflation target of 4.0 per cent is yet to be reached,” Das said.

Das said the inflation trajectory, going forward, would be shaped by the outlook on food inflation, about which there is considerable uncertainty. Adverse weather events remain the primary risk with implications for the rabi crop. Increasing geopolitical tensions are leading to supply chain disruptions and price volatility in key commodities, particularly crude oil, he said.

On the positive side, the progress in rabi sowing has been satisfactory and augurs well for the season. Prices of key vegetables, especially onions and tomatoes, are registering seasonal price correction. Taking into account these factors, the RBI has projected retail inflation at 5.4 per cent for the current year (2023-24) with Q4 at 5.0 per cent.  The policy panel has projected retail inflation for 2024- 25 at 4.5 per cent with Q1 at 5.0 per cent, Q2 at 4.0 per cent, Q3 at 4.6 per cent and Q4 at 4.7 per cent.

Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 bps policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50 per cent on Thursday. The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation, it said.

“Monetary policy must continue to be actively disinflationary to align inflation to the target of 4 per cent on a durable basis. The MPC will remain resolute in this commitment. The MPC also decided to remain focused on withdrawal of accommodation to ensure fuller transmission and anchoring of inflation expectations,” it said

“Monetary policy, in the midst of these lingering uncertainties, has to remain vigilant to ensure that we successfully navigate the last mile of disinflation,” the panel said.