The extant monetary policy setting is well positioned in the backdrop of the growth-inflation dynamics, with growth prospects looking bright in FY25 and headline inflation moderating, according to RBI Governor Shaktikanta Das.

“The Indian economy is growing at a robust pace with an average annual growth of 8 per cent during the last three years. India continues to be the fastest growing major economy in the world.... CPI (consumer price index) headline inflation during January-February 2024 (5.1 per cent in each of the months) has moderated from the elevated level seen in December 2023 (5.7 per cent),” per Das’s statement at the MPC meeting, which was held during April 3 to 5, 2024. RBI released minutes of the meeting on Friday.

He noted that the persistent and broad-based softening in CPI core inflation (CPI excluding food and fuel inflation) by 180 basis points (bps) since June 2023 is driving the disinflation process, though volatile and elevated food inflation is disrupting its pace.

At the last MPC meeting five out of six members voted in favour of the resolution to keep the policy repo rate unchanged at 6.50 per cent. Jayanth R. Varma, Professor, Indian Institute of Management, Ahmedabad, voted to reduce the policy repo rate by 25 basis points.

Five out of six members voted to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. Varma voted for a change in stance to neutral.

“Looking ahead, the baseline projections show inflation moderating to 4.5 per cent in FY25 from 5.4 per cent in FY24 and 6.7 per cent in FY23. This success in the disinflation process should not distract us from the vulnerability of the inflation trajectory to the frequent incidences of supply side shocks, especially to food inflation due to adverse weather events and other factors,” the Governor said.

He cautioned that overlapping food price shocks, apart from imparting volatility to headline inflation, may also result in spillovers to core inflation.

“Lingering geo-political 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,” Das said.

MD Patra, Deputy Governor, said the headroom provided by the steady core disinflation and fuel price deflation does not assure a faster alignment of the headline with the (4 per cent) target.

Consequently, 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 FY25.

Hence, conditions are not yet in place for any let-up in the restrictive stance of monetary policy.

“Downward pressure on inflation must be maintained until a better balance of risks becomes evident and the layers of uncertainty clouding the near-term clear away.

“In the interregnum, the commitment to enduringly aligning inflation with the target of 4 per cent needs to be emphasised. Stabilising inflation expectations is progressing, as reflected in forward-looking surveys; anchoring them is crucial for achieving the inflation target,” Patra said.

Overall, price stability has to be restored in order to ensure that the rising growth trajectory that India is embarking upon is sustained, he added.

‘Patience, need of hour’

Rajiv Ranjan, Executive Director, RBI, observed that going ahead, while monetary policy seems to be on the right track, it is too early to ease guard against inflation.

“It is important that we gain more confidence on our macro numbers for FY25 and their nuances....Return of inflation to the 4 per cent target is our objective and having come this far, it is not far from sight. We need to utilise the space provided by stronger growth to focus on inflation...Instead of haste for policy action, patience is the need of the hour,” he said.

Shashanka Bhide, Honorary Senior Advisor, National Council of Applied Economic Research, said while the projected inflation trends point to further moderation in inflation rate in FY25, they also indicate an upturn well above the target rate of 4 per cent in the second half of the year.

Given the strong momentum of growth at this juncture, it is necessary to maintain monetary policy focus on aligning the inflation trends with the target, he added.