​Staying the course: On the RBI and inflation

The Reserve Bank of India’s Monetary Policy Committee (MPC), in its latest bi-monthly review, has decided to maintain status quo on the benchmark interest rate of 6.50% for the eleventh consecutive time. As the panel’s chairman RBI Governor Shaktikanta Das emphasised, the last mile of disinflation is turning out to be prolonged and arduous for emerging and developed economies. India’s retail inflation, after trending below the median 4% target, for the first time in five years, for two months, spiked over September and October, with food prices leading the price pinch. At its October meet, the six-member MPC had voted 5:1 to hold interest rates, stating the inflation-growth balance was ‘well-poised’. That poise has been shattered, with the economic ground shifting dramatically in the intervening period — while inflation has surged, the deleterious growth numbers for the second quarter have compounded the mix with GDP rising just 5.4% as opposed to the 7% estimated by the RBI. The government has sought to paint the growth blip as a transient occurrence rather than as a sign of an enduring slowdown, but Ministers had called for interest rate cuts from Mint Street even before the GDP print.

It is, perhaps, not a surprise then that the vote of the MPC, which includes three external members, on holding interest rates this time around, has changed to 4:2. Governor Das acknowledged that the near-term inflation and growth outcomes have turned somewhat adverse. He also effectively scotched the clamour for the MPC to look through food inflation, noting that the RBI is bound by the flexible inflation targeting framework laid down in the law that requires headline inflation to be addressed. The central bank’s mandate is to maintain price stability while supporting growth but growth is also impacted by persistently high inflation that cramps households’ spending power, as he pointed out, and this is already visible in urban spends. Both the trajectories warrant closer monitoring for now, and it is not as if a 0.25 percentage point rate cut would tangibly shift consumption or investment impulses in the short run. The RBI remains hopeful of GDP growth recovering and inflation cooling in the second half of the year, even as it revised its 2024-25 projections for the former to 6.6% from 7.2%, and for the latter to 4.8% from 4.5%. Some consider even these downgraded projections as optimistic, but if the Centre takes some fresh steps to cool prices, such as rolling back the import duty hike on edible oils, and spur consumption, it would be able to hasten the interest rate cuts it desires.