Even as the second quarter of FY25 has begun with signs of quickening momentum in the economy, it is prudent to eschew the temptation of time inconsistency (placing more value on the present than on the future) and stay the course on the straight and narrow path of aligning inflation with the 4 per cent target, according to RBI’s latest monthly bulletin.
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RBI officials observed that this does not imply that inflation should reach 4 per cent and stay there before monetary policy considers a change in stance; instead, based on a careful evaluation of the balance of risks, an enduring movement towards the target should provide signals to forward-looking monetary policy to respond.
“When monetary policy authorities committing to price stability renege on that commitment in the pursuit of short-run gains of increasing growth, they can end up losing credibility, unhinging inflation expectations and triggering a surge in inflation. This can also undermine growth sustainability,” central bank officials said in an article on “State of the Economy”.
In this regard, the researchers referred to Governor Shaktikanta Das recent statement that “monetary policy remains squarely focused on price stability to effectively anchor inflation expectations and provide the required foundation for sustained growth over a period of time”.
“Every silver lining has a cloud. Data for June 2024 showed that consumer price inflation ticked up after three consecutive months of moderation as a broad flare-up in vegetable prices halted the overall disinflation that had been underway. This development reinforced the prescient warnings that some members of the monetary policy committee (MPC) expressed in their minutes relating to the June meeting,” RBI officials said.
Inflation edges up
Headline inflation, as measured by year-on-year changes in the all-India consumer price index (CPI)20, edged up to 5.1 per cent in June 2024 from 4.8 per cent in May.
Meanwhile, the officials said the second quarter of FY25 has begun with signs of quickening momentum in the economy. “Global economic activity appears to be strengthening across advanced economies (AEs) and emerging market economies (EMEs) and global trade in goods and services is gathering momentum. Monetary policy divergence is setting the tone for global economic developments. In India, the second quarter of 2024-25 has begun with signs of quickening momentum in the economy. The improvement in the outlook for agriculture and the revival of rural spending have turned out to be the bright spots in the evolution of demand conditions,” the article stated