The monetary policy is at work, with substantial disinflation being achieved, according to an article in the Reserve Bank of India’s (RBI) latest monthly bulletin. However, the road to be travelled stretches ahead till inflation is at or close to the target of 4 per cent, the article titled “State of the Economy”, put together by RBI officials, stated.

The headline CPI (consumer price index-based) inflation has gradually declined from its peak of 7.8 per cent in April 2022 to 5.7 per cent in March 2023 and is projected to ease further to 5.2 per cent by January-March 2024 — a reduction of 260 basis points, according to the officials.

Taylor principle

The authors noted that at this point, the level of the policy rate at 6.5 per cent is 1.25 times the level of inflation four quarters ahead (5.2 per cent in Q4 of 2023-24 as projected by the MPC).

“This satisfies the Taylor principle which has become a central tenet of monetary policy. It postulates that the nominal interest rate should be raised more than point-for-point when inflation rises. Satisfying the Taylor principle is both necessary and sufficient for stabilising inflation,” they said.

The authors underscored that the promontory that monetary policy in India has achieved until now provides just enough headroom to weigh the impact of actions taken so far and to strategise the appropriate response, should the actual inflation prints deviate from the projected path. “Concomitantly, we need to evaluate the effects on the underlying economic activity as past monetary policy actions work their way through the well-known lags associated with the implementation of monetary policy,” they said.

Fillip to growth

The RBI officials emphasised that in time, enduring price and financial stability will strengthen the foundations of the economy and provide a fillip to growth. “Central banks that are invested with dual mandates are at a fork in their course. The RBI has taken the road that is less travelled by, balancing and calibrating both actions and pace,” they said.

The officials said aggregate demand conditions in India remain resilient, supported by a rebound in contact-intensive services. Expectations of a bumper rabi harvest, the fiscal thrust on infrastructure and the revival in corporate investment in select sectors augur well for the economy, they added.

The authors opined that corporate fortunes will hinge around a durable reduction in inflation which will bring in its train stronger consumer discretionary spending and hence revenue growth, alongside a moderation in interest expenses.

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