The softer inflation prints for September and October 2023 and the prolonged pause in the stance of monetary policy has engendered a certain hypermetropia among some stakeholders, according to RBI’s latest monthly bulletin.

This is leading to an irrational long-sightedness whereby inflation forecasts gravitating towards the 4 per cent target sometime in the distant future are sighted clearly whereas high near-term risks of spikes in inflation outcomes on the back of food volatility are blurred, said senior RBI officials in an article “State of the Economy”.

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“Under these conditions, a clamour rises for rate cuts or at least that the central bank commits to a path of moderation in the level of the policy rate. Such views imperil the conduct of monetary policy in the pursuit of its goal of durably aligning inflation with the target. These views also undermine the foundations of growth,” they said.

Inflation pressures

RBI’s projections indicate that inflation will go up further from the September-October 2023 average of 4.9 per cent before it can come down – the projection for Q3 (October-December) 2023-24 is 5.6 per cent; for the year 2023-24 it is 5.4 per cent; and for the first three quarters of 2024-25 it is 4.6 per cent.

“The objective of aligning inflation with the target on a durable basis is far from assured. In earlier editions of this article, we have pointed out that households’ inflation expectations are still not settled; business and consumer confidence in the inflation outlook is yet to turn optimistic. On a real-time basis, inflation is hurting discretionary consumer spending and this, in turn, is holding back top line growth of manufacturing companies as well as their capex,” per the article.

If inflation is not brought back to the (4 per cent) target and tethered there, there is a strong likelihood that growth may falter.

The authors noted that the main risk to the inflation outlook stems from its evolution in the months ahead.

Retail inflation rose to 5.6 per cent in November (from 5.02 per cent in September and 4.87 per cent in October) as the recurrence of food price spikes punctured a brief respite in September and October.

“It is expected that these pressures will linger on into December before the usual winter softening sets in and dispels these adversities. The repetitive nature of food imbalances impinging on prices reinforces our view that for India, it is the food category that is the true ‘core’ of inflation, with second order effects that delay the policy goal of aligning headline inflation with the target,” opined the officials.

Consequently, a lasting solution to these sporadic flares is the only panacea.

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“Supply augmenting measures and adjustments have the lead role here, but monetary policy shall have to respond if food inflation as a whole becomes lastingly elevated and sends secondary impulses across other prices.

“On the other hand, core inflation has been steadily disinflating, attesting to the efficacy of monetary policy actions (cumulative 250 basis points hike in repo rate during May 2022-February 2023) and stance (withdrawal of accommodation),” the officials said.