The last mile of disinflation in India is proving to be particularly “sticky, arduous and very slow”, and the Reserve Bank of India (RBI) has to focus on meeting the 4% retail inflation target rather than engaging in any form of “adventurism”, Governor Shaktikanta Das said today.
“At this point of time, we should avoid any form adventurism, it is better to stay the course and be watchful and play ball by ball,” Das said at an ET Now event, adding that any erratic weather related event may lead to a rise in prices of vegetables, thereby leading to spike in food inflation.
The RBI’s six-member monetary policy committee (MPC) on June 7 maintained the benchmark policy repo rate at 6.5%. However, unlike earlier times, two members of the MPC—Ashima Goyal and Jayant Varma—voted to change the MPC’s stance to “neutral” from “withdrawal of accommodation”. Till April, Varma was the lone MPC member voting for a change in stance.
Das said that food inflation continues to be high and in the last 6-7 months, average food inflation has been at about 8%, while core inflation has moderated substantially and reached 3% in May, a historical low. Food inflation is high primarily due to supply side factors, which is affected by the weather conditions. Extreme heat wave last summer affected pulses cultivation and vegetable production.
Simultaneously, international metal prices have started going up off-late, and taking into account all these factors into consideration, the RBI has forecasted that in FY25, the average inflation will be at 4.5%.
Das said that he is confident of the gross domestic product growing at 7.2% in the current fiscal on account of strong macroeconomic conditions, rural demand picking up, corporates’ stable balance sheet and expectation of higher government and private sector spending in the infrastructure sector.
“On the consumption side, the rural demand which was lagging since Covid-19, and perhaps in first half of last year also, is beginning to improve quite visibly. Rural consumption has picked up, FMCG sales in rural areas has increased, demand for MGNREGS has gone down, agriculture season looks optimistic because of projection of above normal monsoon in south-east region,” he said.
External sector demand is also likely to continue being strong, giving support to domestic exports, particularly in the services sector. Even in the services sector, unlike earlier times when demand was primarily in the IT segment, newer segments like accountancy and legal are now showing higher demand.
India’s current account deficit has remained very low at 1.2% in the 9MFY24 period and Das said he would not be surprised if the full year CAD is lower than 1%.