The balance between inflation and growth is well-poised, with there being greater optimism that food inflation outlook could become more favourable over the course of the year and the India growth story continuing to be intact, said RBI Governor Shaktikanta Das.
This observation comes amid calls from certain quarters to revisit the current retail inflation target of 4 per cent even as two external members of the six-member monetary policy committee (MPC) have made a case for a 25-basis points repo rate cut coupled with a change in the monetary policy stance to “neutral” from “withdrawal of accommodation”.
“The decisive steps taken by the Reserve Bank, supply side measures from the government and cooling of international commodity prices have led to downward shift in inflation from early 2023-24.
“Nevertheless, the pace of disinflation is frequently interrupted by volatile and elevated food inflation. It is the headline inflation that matters. It is the headline inflation with food inflation having a weight of 46 per cent that the people understand,” Das said in his inaugural address at the annual FICCI-IBA Conference.
Bright prospects
With the monsoon progressing well and the healthy kharif sowing raising prospects of better harvest, the Governor observed that here is greater optimism that food inflation outlook could become more favourable over the course of the year. “We have to remain watchful of how the forces impacting inflation play out,” he said.
CPI inflation eased to a five-year low of 3.54 per cent in July vis-a-vis 5.1 per cent in the preceding quarter.GDP growth in the first quarter (Q1) of FY25 slipped to a five-quarter low of 6.7 per cent (vs 7.2 per cent in the preceding quarter).
“The average inflation in India was 5.9 per cent since 2012...The median value of core inflation would be around 5.1 per cent. In case of non-core inflation, it is 5.7 per cent while for headline inflation it is 5.4 per cent. Based on this data it can be argued that there is a case of changing the inflation target of 4 per cent.
“The past data would indicate that something around 5 per cent looks a meaningful target with the band being set around this number. The band of 200 basis points (bps), however, can be reviewed, and a lower number of 100 bps would be consistent with 5 per cent target,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
The Governor observed that notwithstanding the moderation in growth from the previous quarter and below RBI’s projection (7.1 per cent) for Q1, the data show that the fundamental growth drivers are gaining momentum.
“This gives us confidence to say that the Indian growth story remains intact...It is evident that India is on a sustained growth path. Consumption and investment demand, the two main drivers of growth, are growing in tandem,” he said.