The process of bringing down inflation is likely to be a protracted exercise on account of stickiness in core inflation even as estimates suggest that the headline inflation is likely to moderate in the coming fiscal, Reserve Bank of India (RBI) governor Shaktikanta Das said in the minutes of the meeting held by the monetary policy committee (MPC).
The baseline projections of the RBI indicate that headline inflation is likely to moderate to 5.3% in FY24. Although the decline in vegetable prices aided the contraction of CPI inflation in November and December, disinflation process cannot solely rely on food inflation, given its uncertainty and susceptibility to weather events, he said. The data for January show that CPI inflation touched 6.52% owing to higher prices in cereals.
“Overall, there is considerable uncertainty at this stage on the evolving inflation trajectory due to ongoing geopolitical tensions, global financial market volatility, rising non-oil commodity prices, volatile crude oil prices and weather-related events,” Das said in the minutes.
The MPC in its latest meeting increased the repo rate by 25 bps to 6.50% and kept the stance unchanged, which surprised the market participants as it left room for more hikes.
Although the full effects of the monetary policy actions on economic activity are yet to be seen, increasingly it is becoming evident that inflation is weakening domestic consumption, investment and confidence, Michael Patra, deputy governor, RBI, said. Households expectations of inflation are largely unchanged, leading to muted discretionary spends as businesses are witnessing lower sales. The corporate sector has to deal with input cost pressures, which are hampering capital expenditure.
At global level, the fight against inflation is complicated as uncertainty looms while price rise is expected to ease at a stubborn pace, he added.
On the growth front, most MPC members expect the growth to remain robust despite rate hikes. The recovery in contact-intensive services in the post-pandemic period and good prospects of rabi production are likely to support urban and rural consumption, Das said. The thrust on capital spending and infrastructure in the Budget should bolster manufacturing and investment activity, he added.
Two external members – Jayant Varma and Ashima Goyal – voted against the decision to raise the repo rate. The US Fed is expected to cut rates afterwards, and short-term volatility benefits the market players but affects the real sector, Goyal said. Additionally, the US Fed action is due to large excess demand, tight labour markets and an unprecedented deviation from the inflation target, which does not hold true for Indian conditions, and the RBI does not have the space not to follow the Fed, she added.
In H2FY22, the monetary policy was complacent about inflation, which led to an unacceptably high inflation in FY23. In H2FY23, the monetary policy has become complacent about growth, which might lead to an unacceptably low growth, Varma said.