Opinion The Express View: RBI remains steadfast in its commitment to bring down inflation

In its first meeting of this calendar year, the monetary policy committee of the Reserve Bank of India has voted to raise the benchmark repo rate by 25 basis points, continuing its efforts to bring down inflation. Since the beginning of this tightening cycle, the MPC has cumulatively hiked rates by 250 basis points. The repo rate now stands at 6.5 per cent. Alongside, the committee has also retained its stance, deciding to remain focused on withdrawal of accommodation. The tone of the policy was decidedly hawkish. The MPC noted that policy action was required to keep inflation expectations anchored, and “break” the persistence in core inflation. However, the decision of the committee was not unanimous. While the growing dissensions within the committee suggest that the terminal rate — the rate at which the central bank will stop hiking rates and take a pause — is approaching, there is a possibility of further tightening if the situation warrants. As RBI Governor Shaktikanta Das has pointed out, adjusting for inflation, the policy rate still trails its pre pandemic level.

Recent data does signal that retail inflation has begun to ease. Inflation, as measured by the consumer price index, was below the upper threshold of the central bank’s inflation targeting framework for the last two consecutive months. However, much of the decline was driven by a fall in food inflation, especially vegetables. However, core inflation continues to remain a source of concern: It remains elevated, signalling that price pressures are fairly broad-based. The RBI’s forecast projects inflation next year at 5.3 per cent, with the fourth quarter at 5.6 per cent. This implies that inflation will continue to remain above the central bank’s target.

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On growth, the central bank is optimistic in its assessment. It expects the Indian economy to grow at 6.4 per cent in 2023-24. While this is broadly in line with expectations of the Economic Survey, projections by independent analysts suggest that the economy is likely to grow at a slower pace. Considering that the effects of monetary policy are felt with a lag, the committee should now assess the impact of the cumulative hikes so far on inflation and the economy. As the Governor’s statement notes, the rate hikes since May 2022 continue to work their way through the system.