Reserve Bank of India (RBI) vowed to stay the course on tightening money supply despite acknowledging that recent interest rate hikes 'are doing their job'.
"Monetary policy must continue to be actively disinflationary to ensure fuller transmission and anchoring of inflation expectations. The rate action so far is still working its way into the economy," said RBI Governor Shaktikanta Das in his speech today on the latest monetary policy review.
He acknowledged that consumer price index (CPI) based headline inflation eased to 4.9% in October helped by cooling food and fuel prices.
"The fact that core inflation has also trended lower and household inflation expectations have become better anchored gives us the confidence and conviction that monetary policy is doing its job," Governor Das said.
Nevertheless, he pointed out, the inflation target of 4% is yet to be reached and the central bank needs to remain vigilant to ensure the ongoing disinflation process remains on track.
In this context, RBI has to maintain its "withdrawal of monetary policy accommodation" stance.
Core inflation rose fell to around 4.25% in October from 4.5% in the preceding month. It had been persistent for nearly three years, since December 2019.
Easing Outlook
Das said the 'risks' on inflation are evenly balanced, taking all the global and local factors into account.
“On the positive side, global commodity prices, particularly, agricultural commodity prices, have softened except rice,” Governor Das said in his policy statement.
For import-sensitive items like edible oils as well, global prices continue to remain soft, helping anchor domestic inflation levels to some extent.
Besides policy rate hikes, supply-side measures by the government are also helping contain price pressures in case of food items such as vegetables.
International crude oil prices have also now softened considerably from peaks seen earlier, though volatility remains a risk on that front.
The decline in global commodity prices does provide some respite and will contribute to lowering inflation going forward.
RBI sees the inflation outlook being also influenced by the uncertain food price scenario, given that high-frequency food price indicators are reflecting elevated pressure currently in key kitchen staples.
The further trajectory on this front, therefore, needs close monitoring to check for potential second-round effects.
"Taking into account these factors and on the assumption of normal monsoons, CPI inflation is projected at 5.4 per cent for 2023-24, with Q3 at 5.6 per cent and Q4 at 5.2 per cent. CPI inflation for Q1:2024-25 is projected at 5.2 per cent; Q2 at 4.0 per cent; and Q3 at 4.7 per cent. The risks are evenly balanced," Das said.