The March CPI inflation numbers are out, and in retrospect, RBI’s recent stance of a ‘pause’ in repo rate hikes suddenly appears pragmatic. CPI inflation declined to 5.66 per cent in March, the lowest inflation print since December 2021. Core inflation, or the ex-food ex-fuel inflation, has also eased to 5.8 per cent, seemingly validating the RBI’s status quo stance.

Will the latest numbers prod the central bank to ‘pivot’? While the urge to gravitate to such a stance will undoubtedly be high, the RBI may need to tread cautiously. Why so?

First, one can clearly attribute the recent easing in headline, core, and food inflation to a favourable base effect. Notwithstanding a month-on-month fall in headline CPI, retail inflation continues to breach the RBI’s medium-term target of 4 per cent by a significant margin for 42 consecutive months now. Disaggregated numbers reveal that inflation in subsistence items like cereals, pulses, fuel, and clothing is still quite high on a YoY basis. Rising milk prices (12 per cent YoY) and the recent 12.12 per cent price hike in essential drugs shall fuel inflation and feed into inflationary expectations.

Food inflation

Moreover, unseasonal rainfall, particularly in the northern States, threaten to adversely impact food inflation and the CPI (food basket accounts for 40 per cent weightage) in the near term. Coupled with this, the effect of El-Nino conditions predicted in the second quarter can not only feed into long-term inflationary expectations, but with core inflation remaining high and relatively sticky (above 6 per cent for past two years with a marginal decline in March), disruption to agricultural production will affect headline inflation.

Second, given the easing of prices, the urge to pivot could be to boost investments and growth. However, higher private investments depend on, among other things, sustained growth in consumption demand and better consumer sentiments. Depressed consumption demand, particularly the current tail-off in discretionary spending, is primarily due to the inflationary pressures in the economy, which still persists.

A recent CMIE study indicates that private final consumption expenditure (PFCE) is likely to grow at a meagre 4.5 per cent in FY24, even lower than the long-term average annual PFCE growth of 4.9 per cent recorded during the five decades ending March 2020. To boost consumption demand and growth, there is a strong case that RBI does much more to rein in inflation, which would otherwise erode consumers’ purchasing power.

Third, OPEC and other oil-producing countries announced further production cuts of approximately 1.16 million bpd in early April. Consequently, international oil prices, which were falling on the backdrop of a slowdown in the US and EU, have risen by around 6 per cent, and can increase further.

India imports about 85 per cent of its crude oil demand. Besides worsening the current account deficit, the rise in crude prices will weaken the rupee and lead to higher imported inflation.

Fourth, operating in an open-economy framework, it may be premature for the RBI to decouple its monetary policy stance from other major central banks that have been responding to the Fed’s tightening cycle by raising policy rates, despite a slowdown in growth and moderation in prices. Major EMEs like Hungary, Chile, and Brazil have raised policy rates by 1,240 bps, 1,075 bps and 1,175 bps, respectively, between March 2021 and March 2023. In contrast, India has raised its key policy rate by 250 bps in the same period. Given current fundamentals, the RBI can ill-afford to reverse the catch-up game on rate hikes as the economy’s bandwidth to absorb sharp and sudden shocks is limited. The RBI should continue to prioritise price stability over any other macroeconomic goals.

Nandy is Assistant Professor, IIM Ranchi, and Sur is Assistant Professor, Jindal Global Law School