With his inflation at 4% intent, RBI chief’s task is cut out

The RBI Governor Shaktikanta Das recently stated that the central bank is firm on bringing down inflation to four per cent, adding that the monetary policy must always be forward-looking. Taking a policy approach that only looks at the past can lead to problems, and to drive home his point, Das mentioned about driving a car on a road with potential hazards. The driver must be able to see ahead and adjust the speed of the car accordingly but if the driver reacts too late to a speed bump, an accident was most likely to happen, he said while underscoring his forward-thinking notion. He also said that RBI remains prepared to undertake policy responses to deal with supply shocks, which have become more frequent and have profound implications. Das opined that the current episode of high global inflation and preceding overlapping shocks of the pandemic and the Russia-Ukraine war have raised significant issues and challenges for the conduct of the monetary policy whose framework in India has evolved in line with the developments in theory and country practices, the changing nature of the economy and developments in financial markets.

Within the broad objectives, the relative emphasis on inflation, growth and financial stability has, however, varied across monetary policy regimes since independence. The RBI has adopted a prudent approach and taken several initiatives to revamp regulation and supervision of banks, NBFCs and other financial entities by developing an integrated and harmonised architecture. The recurring food price shocks pose a risk to anchoring inflation expectations. Consumer price-based inflation (CPI) rose to a 15-month high of 7.44 per cent in July from 4.81 per cent in June, primarily driven by a rise in prices of vegetables, cereals, pulses, spices and milk and related products. The central bank has been mandated to maintain price stability, keeping in mind the objective of growth. Price stability has been numerically defined as maintaining a headline CPI inflation target of four per cent with a tolerance band of +/- 2 per cent.

India’s GDP growth in Q1 at 7.8 per cent was a tad below the eight per cent expectations of analysts. This once again makes India the fastest growing major economy, a position the country is likely to maintain for several years now. Yet, experts do not expect this pace to continue for the rest of the year and see the yearly growth at 6.2 per cent. But that too is a very good performance given the current global backdrop. With strong growth and elevated inflation, the RBI would be hard pressed to tighten monetary policies. If retail inflation does remain high in August, one should be ready for the rate hike, albeit marginally. Only time will tell to what extent the RBI governor will be able to keep his take on inflation, while maintaining the country’s growth momentum on track.