Wayward elephant: On the RBI’s rate decision

Price stability must remain non-negotiable

April 08, 2024 12:30 am | Updated 10:35 am IST

The RBI’s Monetary Policy Committee (MPC) has opted to keep the benchmark policy repo rate unchanged at 6.5% for a seventh consecutive meeting citing food price pressures that are impeding its efforts to slow inflation to the 4% target on a durable basis. Explaining the rate decision and the MPC’s resolve to keep the policy stance focused on the withdrawal of accommodation, RBI Governor Shaktikanta Das remarked that the ‘elephant in the room – inflation’, which had hit a peak of 7.8% in April 2022, ‘appeared to be returning to the forest after having gone out for a walk’. “We would like the elephant to return to the forest and remain there on a durable basis,” he said, emphasising that in the best interest of the economy, it was essential to ensure that retail inflation continued to moderate and aligned to the target on a durable basis. The monetary authority’s repeated emphasis on ‘a durable basis’ underlines its concern that headline inflation and food price inflation in particular have remained stubbornly unpredictable, with the headline Consumer Price Index-based reading stuck above the RBI’s 4% target for 53 months through February 2024. Nor are the MPC’s projections for price stability in the new fiscal year significantly reassuring in terms of the target: CPI inflation is expected to slow slightly to an average of 4.9% in the current quarter, then decelerate markedly and dip below target to 3.9% in Q2, before quickening again to 4.6% and 4.5% in Q3 and Q4, respectively.

The MPC is, however, more confident about the outlook for economic growth in the 12 months through March 2025, with the GDP expected to expand by 7% on average this year. For this it cites a multiplicity of factors: from expectations of a normal south-west monsoon, that it posits will boost agricultural activity and rural demand, to sustained momentum in the manufacturing and services sectors. It also points to the RBI’s March round of the consumer confidence survey, which indicates that urban households are less pessimistic about the current situation and anticipate improvements in one year’s time on all five key parameters surveyed. Monetary policymakers assert that improving incomes and a rise in readiness to spend on non-essentials augur well for a strengthening in private consumption, which has been struggling for momentum in recent quarters. It is the expectation of strong growth that gives the RBI the policy space to focus on targeting inflation, Mr. Das said. Only too aware that sticky inflation has not only dampened discretionary spending so far but also led to a sharp surge in personal loans for meeting essential expenditure, the RBI chief’s determination to send the elephant back to the forest or risk seeing growth lose momentum again is well justified. Price stability can and must be non-negotiable.

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