RBI Bulletin: ‘Objective of aligning inflation with 4% target far from assured’

If inflation is not brought back to the 4 per cent target and ‘tethered there’, there are chances that the growth may get affected, an article published in the Reserve Bank of India’s (RBI) monthly bulletin said.

While consumer price index (CPI) -based inflation for FY24 is expected to be at 5.4 per cent, for the first three quarters of 2024-25 it is projected at 4.6 per cent, according to the ‘State of the Economy’ article published in the RBI’s December bulletin.

“The objective of aligning inflation with the (4 per cent) target on a durable basis is ‘far from assured’. If inflation is not brought back to the target and tethered there, there is a strong likelihood that growth may falter,” the article said.

Headline inflation, as measured by year-on-year changes in the all-India CPI, increased to 5.6 per cent in November 2023 from 4.9 per cent in October. In September, CPI print was at 5.02 per cent. RBI Governor Shaktikanta Das has emphatically said that the central bank is completely focused on achieving the 4 per cent inflation target. In the December policy, the RBI kept the repo rate – the key policy rate – unchanged at 6.5 per cent for the fifth time in a row due to concerns over higher inflation amid uncertain food prices.

The article further said that the softer inflation prints for September and October 2023 and the prolonged pause in the stance of monetary policy has engendered a certain hypermetropia among some stakeholders – an irrational long-sightedness whereby inflation forecasts gravitating towards the 4 per cent target sometime in the distant future are sighted clearly whereas high near-term risks of spikes in inflation outcomes on the back of food volatility are blurred.

Under these conditions, a clamour rises for rate cuts or at least that the central bank commits to a path of moderation in the level of the policy rate. Such views imperil the conduct of monetary policy in the pursuit of its goal of durably aligning inflation with the (4 per cent) target,” the article said, adding that these views also undermine the foundations of growth.

The article is prepared by RBI Deputy Governor Michael Patra and other central bank officials. The RBI said the views published in the article are of the authors and not of the institution. The earlier editions of the ‘State of the Economy’ article had pointed out that households’ inflation expectations are still not settled; business and consumer confidence in the inflation outlook is yet to turn optimistic. On a real-time basis, inflation is hurting discretionary consumer spending and this, in turn, is holding back topline growth of manufacturing companies as well as their capex, it had said. On economy, the article said that despite significant global headwinds, the Indian economy remained the fastest growing major economy in 2023. As per the projections, the growth is likely to be sustained in H2:2023-24 and 2024-25 despite some moderation.

CPI inflation for FY24
As per the RBI’s ‘State of the Economy’ article, consumer price index (CPI)-based inflation for FY24 is expected to be at 5.4 per cent and 4.6 per cent for the first three quarters of FY25. Headline inflation increased to 5.6 per cent in November 2023 from 4.9 per cent in October.

The RBI, in its December monetary policy, revised the real GDP projection for FY24 to 7 per cent from 6.5 per cent earlier. “In India, the broad-based strengthening of economic activity that is under way will likely be sustained by easing input costs and corporate profitability,” it said. Domestic financial markets have also been lifted by the abiding strength of the real economy.