Taming inflation has to remain the focus area of RBI

The minutes of the recent bimonthly meeting of the monetary policy committee (MPC) of the Reserve Bank of India (RBI) are a clear-cut indication that the central bank will continue to keep inflation under check. The minutes reflect concerns around the sticky last leg of disinflation and sustained food price-spikes meant that a rate pause was backed by a majority, with healthy domestic growth so far – also cited as a reason to stay on hold. Moreover, it reflects a sense of comfort, owing to an improved global environment, moderating core inflation and robust domestic growth. Most MPC members continued to back the need to hold rates steady, due to elevated food price pressure, and the sticky last mile of disinflation.

Prof. Varma differed, and put more weight on the growth function, stating that a real rate of two per cent is not needed to bring inflation down to the target rate. Whereas RBI Governor Dr. Shaktikant Das and Dr. Patra were far more stringent, reflecting that the policy can be eased only when inflation falls to the target on a sustained basis.

On the growth front, Dr. Goyal and Dr. Ranjan opined that robust growth so far allowed the MPC more time to ensure that inflation continues to move towards the target. In general, all MPC members noted that growth momentum remains robust, while the tone and comments suggest that it has given the MPC more breathing space to keep rates on hold, and focus on bringing down inflation to the target on a sustainable basis. With only Dr. Goyal mentioning liquidity dynamics, it is clear that this is not a concern at present. Dr. Ranjan agreed with this viewpoint, and also cited the fact that core inflation has been soft despite strong growth as further evidence. However, he differed on the policy response, stating that this gives the MPC more leeway to be cautious on inflation.

Dr Goyal cited the example of large debt inflows due to low rupee volatility and FX premiums, despite a narrow interest rate differential with the USA, as pointing towards policy freedom from the US rates. Dr. Shaktikant Das opined that price and financial stability are essential to sustain a long haul of high growth. He also said that policy imperative at the current juncture is to remain focused on achieving the four per cent inflation target on a durable basis, keeping in mind the objective of growth. However, experts maintain that global dynamics will continue to play a major role in the bank’s reaction function, especially with a comfortable domestic macro environment. Besides, the RBI will not precede the Fed in any policy reversal in CY24, but policy management will have to stay vigilant. FY24E inflation, as per Emkay Global, stands at 5.4 per cent. Thus the RBI, as per IIFL Securities, may opt for status quo on rates, given that inflation will remain the primary concern.