RBI to Shift Focus Towards Growth and Gradual Disinflation
RBI to Shift Focus Towards Growth and Gradual Disinflation

The RBI governor highlighted in the minutes of the RBI policy released on Friday that headline CPI inflation is decreasing, albeit at a sluggish rate. Governor Shaktikanta Das pointed out that the final phase of reducing inflation is proving to be gradual and prolonged, primarily due to food inflation. Looking ahead, baseline projections indicate that inflation is expected to ease to an average of 4.5 percent in 2024-25. However, the governor cautioned that in the coming months, factors such as unusually warm summer conditions affecting certain perishable goods, potential shortfall in rabi crop production for some pulses and vegetables like potatoes and onions, and upward adjustments in milk prices should be closely monitored.

With retail inflation approaching the Reserve Bank of India's (RBI) target of 4%, the Monetary Policy Committee (MPC) member Jayanth R Varma emphasized the need for a shift in monetary policy to prioritize economic growth.Varma highlighted that Consumer Price Index (CPI) inflation is expected to be just 0.5 percentage points above the target in 2024-25, signaling a period of steady disinflation. He described core inflation as "extremely benign" and stated that the prolonged phase of high inflation is nearing its end.

"In the coming quarters, we will witness further disinflation, with inflation stabilizing at the 4% target," Varma told PTI. He noted that the fight against inflation has come at the cost of economic growth. The projected growth rate for 2024-25 is expected to be 0.75-1 percentage points lower than the 8.2% growth recorded in 2023-24, with India's potential growth rate around 8%.

Earlier this month, the RBI forecasted a GDP growth rate of 7.2% for FY25. "In this context, monetary policy needs to balance the focus on inflation with supporting growth," Varma emphasized. He advocated for a less restrictive monetary policy that continues disinflation while promoting economic expansion.

Varma also warned that growth forecasts for 2025-26 are similar to those for 2024-25, implying a sustained sacrifice in growth of 0.75-1 percentage points over two years. He praised government initiatives such as digitalization, tax reforms, and increased infrastructure investments for boosting India's potential economic growth to 8%.

At its latest meeting, the RBI kept the key interest rate steady at 6.5% for the eighth consecutive time. The central bank projected CPI-based retail inflation to stabilize at 4.5% for FY25, with quarterly estimates ranging between 3.8% and 4.9%.

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