Caution stays in last leg of inflation fight

Premature move may undermine success achieved so far: Das

Most of the six members of the Reserve Bank of India’s (RBI’S) monetary policy committee (MPC), in the February review meeting on credit policy, decided not to drop their guard against inflation, basing themselves on the thinking that the last mile to achieve the target of 4 per cent rate could be the most challenging.

The minutes of the meeting, released on Thursday, showed the rate-setting panel kept the policy repo rate unchanged at 6.5 per cent for the sixth consecutive time while maintaining the withdrawal of the “accommodation” stance. All members except Jayanth Varma voted in favour of both the resolutions.

As the minutes showed, RBI Governor Shaktikanta Das said “At this juncture, monetary policy must remain vigilant and not assume that our job on the inflation front is over.”

“We must remain committed to successfully navigating the ‘last mile’ of disinflation, which can be sticky. As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far,” Das said, adding price and financial stability were essential to sustain a long haul of high growth. Deputy Governor M D Patra spoke of the importance of restraining inflation for growth to be inclusive and sustained.

“… private consumption, which accounts for 57 per cent of GDP, is languishing under the strain of still elevated food inflation. This is particularly telling in rural areas,” he said.

Patra said it was only when the inflation rate subsided and stayed close to the target lastingly that policy restraint could be eased. The central bank’s target is to keep the inflation rate at 4 per cent, within the range of 2-6 per cent. Rajiv Ranjan, another internal member, cautioned the markets went overboard if they saw a rate cut coming and this made managing inflation tougher. “Markets are currently running ahead of policy makers worldwide including India,” he said.

“Successfully managing the final descent of inflation is the most challenging part of the journey and the history of past 100 inflation episodes teaches us that inflation shock, in general, tends to be persistent,” he added.

External member Varma, who voted for a rate cut of 25 basis points, along with a change in stance to “neutral”, warned of high real interest rates.

“Inflation is projected to average 4.5 per cent in 2024-25, and, therefore, the current policy rate of 6.5 per cent translates into a real rate of 2 per cent. I do not believe that such a high real rate is required at this stage to drive inflation down to the target of 4 per cent,” he said. Stating that there was no evidence the economy was overheating, he said:

“The majority of the MPC worry that the output gap has already closed, and that the projected growth rate of 7 per cent for 2024-25 exceeds the growth potential of the Indian economy. I do not think that such growth pessimism is warranted.”