The Reserve Bank of India’s decision to raise its benchmark policy rate yet again, albeit by a smaller quarter percentage point, reflects a welcome resolve in staying committed to ensuring durable price stability. Given that the Monetary Policy Committee’s primary mandate is to steer retail inflation towards a 4% target, and that core price gains have stayed stuck above or almost at 6% for 20 months, the rate setting panel voted by a 4-2 majority to continue tightening policy. Governor Shaktikanta Das emphasised the significance of the MPC’s unwavering focus on inflation when he noted that medium-term growth prospects would be best strengthened by ‘keeping inflation expectations anchored and breaking the persistence of core inflation’. That inflation remains the key risk to the growth outlook, notwithstanding the easing in the headline print for retail price gains over November and December, was stressed by the MPC. The panel pointed to the deflation in vegetable prices in end 2022 and cautioned that this trend could likely dissipate as summer approaches and prices harden. Commodity prices are also expected to see upward pressure globally, given the lifting of most COVID-related restrictions, particularly in China. Specifically, the recent uptrend in Brent futures and the intensifying Ukraine conflict forebodes the possibility that oil costs may well upset the RBI’s assumption of an average price of $95 per barrel for India’s crude basket.
The MPC’s decision to raise rates by a marginally smaller 25 basis points (bps) this time following its December decision to temper the tightening to 35 bps after three straight half percentage point increases, shows it is cognisant of the growth-retarding challenges that rising credit costs could pose to the ongoing post-pandemic recovery. Still, the fact that the Indian economy has proved more resilient, underpinned by a rebound in domestic demand especially for contact-intensive services and discretionary spending, has provided a degree of comfort to monetary policymakers. This was manifest in their upgrades to the GDP growth forecasts for the first two quarters of the coming fiscal year. While the RBI raised its growth outlook for Q1 FY24 to 7.8%, a sizeable 70 bps up from its projection in December, it lifted its Q2 projection by 30 bps to 6.2%. Mr. Das’s unequivocal assertion that monetary policy must be “tailored to ensuring a durable disinflation” rightly echoes a recent blogpost by three IMF economists who warned that central banks need to stay resolute as any ‘premature loosening’ of policy risks a sharp resurgence in price gains that could leave countries susceptible to further shocks. Ultimately, price stability is and must remain the bedrock for a durable economic recovery.
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