RBI remains cautious on inflation front

RBI said the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth
Food inflation has the potential to affect next year's elections (Photo | Debadatta Mallick)
Food inflation has the potential to affect next year's elections (Photo | Debadatta Mallick)

The Reserve Bank of India (RBI) continues to remain cautious on the inflation front as it maintains the FY24 inflation target at 5.4%.

The central bank expects the retail inflation to be at 5.6% in Q3 and 5.2% in Q4 of FY24. Going forward, it sees retail inflation easing in FY25 with Consumer Price Index (CPI) gaining 5.2% in Q1, 4% in Q2 and 4.7% in Q3 of FY25.

RBI governor Shaktikanta Das expressed his satisfaction that headline CPI moderated to 4.9% in October from 7.4% in July of 2023.

“The moderation was observed across all segments, namely food, fuel and core. There has been broad-based easing in core inflation (Inflation excluding that in food and fuel) which is indicative of successful disinflation through monetary policy actions,” said the governor in his monetary policy statement on Friday.

However, he cautions that the near-term outlook is masked by risks to food inflation which might lead to an inflation uptick in November and December.

“This needs to be watched for second round effects, if any. Domestic economic activity is holding up well as assessed in the previous MPC meetings and as reflected in the Q2:2023-24 GDP growth,” added the RBI governor.

The governor reiterated that the monetary policy committee (MPC) remains highly alert and is prepared to undertake appropriate policy actions if needed to ensure inflation does not rear its heads again.

“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. Hence, the MPC decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth,” said Das.

Though the governor expressed his satisfaction on being able to bring down the headline retail inflation below 5%, he remined of the fact that the target of 4% inflation remains elusive.

He pointed out that headline inflation continues to be volatile due to multiple supply side shocks which have become more frequent and intense.

“The trajectory of food inflation needs to be closely monitored. Intermittent vegetable price shocks could once again push up headline inflation in November and December. While monetary policy would look-through such one-off shocks, it has to stay alert to the risk of such shocks becoming generalised and derailing the ongoing disinflation process,” said the governor.

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