Inflation should reach the 4% target in FY24 after moderating to 6% by the fourth quarter of FY23, Reserve Bank of India (RBI) deputy governor Michael Patra said in the minutes to the monetary policy committee’s (MPC) June meeting.
According to Patra, in June, the excise duty cuts on petrol and diesel will have kicked in strongly and knocked off 20 basis points (bps) from headline inflation. Thereafter, other measures will work like second order effects to soften core inflation at the margin.
Inflation measured by the consumer price index (CPI) eased to 7.04% in May from 7.79% in April.
As monetary policy works through its lags, demand will inevitably get restrained and become compressed to the level of supply, Patra said. “Inflation will fall back to below 6% by the fourth quarter of 2022-23. In 2023-24, it should moderate to 4%. This is the most pragmatic result that can be hoped for under the prevailing extraordinary circumstances,” he said.
Patra observed that under the current circumstances, such an inflation trajectory would minimise the loss of output. If real gross domestic product (GDP) growth averages between 6-7% of GDP in 2022-23 and 2023-24, the nascent recovery shall get “a fair chance of reaching the sunlight,” Patra said.
RBI executive director Rajiv Ranjan stressed on the need to account for the swifter pace of transmission under the external benchmark-linked loan pricing regime while frontloading policy measures. “With more than 40% of the total floating rate outstanding loans linked to external benchmarks, the degree of pass-through to actual lending rates has increased and this would strengthen monetary transmission in the current cycle,” Ranjan said.
External member Jayanth Varma said that the MPC continues to have a lot of catching up to do in terms of the pace of monetary tightening. He pointed out that while between April and June, the MPC raised the policy rate by 90 bps, the RBI’s projection of inflation for FY23 rose by 100 bps to 6.7% during the same period.
“The real policy rate, therefore, remains more or less where it was in April. Clearly, more needs to be done in future meetings to bring the real policy rate to a modestly positive level consistent with the emerging inflation and growth dynamics,” Varma said.
RBI governor Shaktikanta Das voted for a change in the policy stance to provide greater clarity on the MPC’s policy intent by focusing wholly on withdrawal of accommodation. “As our policy in recent months has been unambiguously focussed on withdrawal of accommodation, both in terms of liquidity and rates, the change in wording of stance should be seen as a continuation and fine-tuning of our recent approach,” Das said.
Aditi Nayar, chief economist, Icra, said that all MPC members may not have the same outlook for the peak repo rate as of now. “If the CPI inflation in FY24 moderates to 4%, as alluded to by Dr. Patra, then our expectation that the additional repo hikes in this tightening cycle will be limited to 60 bps, will yield a positive real rate of 1.5%,” she said.
Icra is of the view that after additional repo rate hikes of 60 bps over the next two reviews, the MPC will pause to assess the impact of monetary tightening on growth.