Opinion Express View: Fall in inflation has created space for RBI to maintain status quo on rates

In January and February this year, retail inflation, as measured by the consumer price index, had edged above the upper threshold of the Reserve Bank of India’s inflation targeting framework. This has reversed in March, with data released by the National Statistical Office on Wednesday showing that inflation has fallen sharply and has stayed within the central bank’s target band. The consumer price index fell to 5.66 per cent in March, down from 6.44 per cent in February. However, despite this decline, inflation averaged 6.2 per cent in the fourth quarter (January-March), well above the central bank’s projection of 5.7 per cent made in the February monetary policy committee meeting.

The data shows that inflationary pressures have eased across food and non-food categories. The consumer food inflation has dipped to 4.79 per cent in March, down from 5.95 per cent in February. While cereal and milk inflation remain high, vegetables and oils have exerted downward pressures. There are, however, some upside risks to food prices in the coming months, from heatwaves to how the monsoon eventually plays out. But most analysts, as of now, do not expect food inflation to perk up significantly in the months ahead. Alongside the fall in food inflation, the moderation in core inflation is equally significant. After staying sticky for a long period, it has fallen below 6 per cent in March. This declining trend is observed across rural and urban areas. The disaggregated data shows that even while the individual components remain elevated, most have seen a decline over the past three months, with the exception of housing.

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In its last meeting, the monetary policy committee had voted unanimously to keep the benchmark repo rate unchanged at 6.5 per cent. However, RBI Governor Shaktikanta Das had at the time emphasised that the decision was to take a pause and should not be considered as a pivot. This implied that the MPC could raise rates in upcoming meetings if the data so warranted. However, this seems unlikely. While there are upside risks, most analysts expect retail inflation to trend lower in the coming months due to the base effect. This would imply a period of extended pause — the MPC meets next in June. Inflation is, however, unlikely to fall to the central bank’s target of 4 per cent this year. On the other hand, there is growing concern that economic activity is likely to slow down considerably, falling well below the RBI’s latest estimate — the central bank has projected the economy to grow at 6.5 per cent in 2023-24. This is higher than assessments by most other agencies. If growth disappoints, coming in significantly below the RBI’s expectations, it raises the question of whether the MPC will pivot towards cutting rates towards the end of the year.