MUMBAI: The strong growth momentum gives the central bank the policy space to ‘unwaveringly focus’ on lowering inflation, Reserve Bank of India governor Shaktikanta Das said in the minutes of latest the monetary policy meeting, released on Friday. The prevailing geopolitical tensions and their impact on commodity prices and supply chains are adding to uncertainties in the inflation trajectory, he said.
“The strong growth momentum, together with our GDP projections for 2024-25, gives us the policy space to unwaveringly focus on price stability,” said Das.
Gains in disinflation achieved over the last two years have to be preserved and taken forward towards aligning the headline inflation to the 4% target on a durable basis, Das said.
RBI’s six-member monetary policy committee voted five-to-one to keep the benchmark repurchase rate unchanged at 6.5% and retain its policy stance of withdrawal of accommodation.
Aiming at taming inflation, the RBI has raised the repo rate by a total of 250 basis points between May 2022 and February 2023. Rate hikes have started yielding results as inflation has shown a declining trend over the past several months. The retail inflation in March eased to 4.85% from 5.09% in February.
Das said overlapping food price shocks, apart from imparting volatility to headline inflation may also result in spillovers to core inflation. “Lingering geopolitical tensions and their impact on commodity prices and supply chains are also adding to uncertainties in the inflation trajectory. These considerations call for monetary policy actions to tread the last mile of disinflation with extreme care.”
Jayanth Varma, who voted for a 25-basis-point rate cut for a second consecutive meeting, said the current real interest rate of around 2% is excessive. “The fact that economic growth in 2024-25 is projected to slow by over half a percent relative to 2023-24 is a reminder that high interest rates entail a growth sacrifice,” said Varma.
The central bank has projected a 7% growth for the fiscal that started in April, compared with an estimated 7.6% for the year ended March 31.
“Headline inflation can be expected to remain in the upper reaches of the tolerance band until favourable base effects come into play in the second quarter of 2024-25. Hence, conditions are not yet in place for any let-up in the restrictive stance of the monetary policy,” said RBI deputy governor Michael Debabrata Patra.
“While the projected trends point to further moderation in inflation rate in 2024-25, they also indicate an upturn well above the target rate of 4% in the second half of the year. Given the strong momentum of growth at this juncture, it is necessary to maintain the monetary policy focus on aligning the inflation trends with the target,” said Shashanka Bhide, an external member in the panel.
Ashima Goyal, another external member, said: “In the current situation of multiple uncertainties, maintaining the stability must have priority.”
Rajiv Ranjan, an executive director at the RBI, said while low core inflation helps in disinflation, concerns remain over the food inflation outlook and that “RBI must remain watchful on upside risks to inflation outlook from adverse climatic factors, supply-side shocks and geopolitical events”.
Source: The Financial Express