RBI governor Shaktikanta Das said, “Two years ago, when inflation was at its peak at 7.8%, the elephant in the room was inflation.The elephant now appears to have gone out of the room for a walk in the forest.” “We would like the elephant to stay in the forest. We would like inflation to align with the target on a durable basis,” he added. RBI has a 4% inflation target. In Feb 2024, retail inflation stood at nearly 5.1%.
Das said inflation has come down significantly but remains above the 4% target and food inflation continues to exhibit considerable volatility impeding the ongoing disinflation process. He said high and persistent food inflation could unhinge anchoring of inflation expectations which is underway.
“Our ongoing effort is to ensure fuller transmission of policy actions and anchoring of household inflation expectations. The strong growth momentum, together with our GDP projections for 2024-25, give us the policy space to unwaveringly focus on price stability,” said Das.
He said deflation in fuel is likely to deepen in the near term, following the cut in cooking gas prices in March.
“Notwithstanding the cut in petrol and diesel prices in mid-March, the recent uptick in crude oil prices needs to be closely monitored. Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” Das said.
Despite optimism about growth, which RBI governor projected at 7.5% for FY25, his hawkish comments on inflation (projected at 4.5% for FY25) seemed to indicate that rate cuts may be delayed. Economists are now ruling out a rate cut in the first half.
The repo rate, which was cut to 4% in March 2022 to dampen the economic impact of the pandemic, remained unchanged until May 22, when it was hiked to 4.4% after the Ukraine invasion. Since then, it was hiked five times until it hit 6.5% in Feb 2023.
“It is the level of inflation going forward one year ahead, that is what really guides us in our journey of attaining price stability,” said Das.
Like in the previous policy, the MPC decided by a 5 to 1 majority to keep the policy repo rate unchanged at 6.5%. Consequently, the standing deposit facility rate remains at 6.25%, the marginal standing facility rate remains at 6.75%, and the Bank Rate remains at 6.75%. The MPC also decided by a majority of 5 out of 6 members to remain focused on the withdrawal of accommodation. Das said that the global economy was resilient and trade growth was picking up, although slower than historical averages. He added that last-mile disinflation remained a challenge. Das said that high levels of debt in advanced economies were dormant risks.