“For monetary policy, the recommendation would be ‘wait and watch’, while guiding inflation towards the imminent onset of a low–inflation regime,” RBI deputy governor Michael Debabrata Patra said in a paper published in the bulletin published Friday.
He, however, pointed out that individual sub-groups are exhibiting higher volatility since the second half of FY23, and “sporadic supply shocks are at work”. “But, importantly, covariance is declining.”
Patra called for fine-tuning measures to align demand and supply of specific goods and services. This lies outside the realm of monetary policy but is being undertaken on an ongoing basis to head off potential price pressures from getting deep-seated, he said in the paper, which is co-authored with RBI officers Joice John and Asish Thomas George.
They argued that the contribution of cyclically sensitive inflation emanating from categories such as household goods and services, education and housing is picking up in the recent period. “Hence, monetary policy has to be in readiness to act pre-emptively to ensure that inflation weathers demand pull and is guided to the target,” said the report.
The bulletin’s state of the economy report also talked about the importance of the central bank’s readiness should inflation rise.
“The promontory that monetary policy in India has achieved up until now provides just enough headroom to weigh the impact of actions taken so far and to strategise the appropriate response should actual inflation prints deviate from the projected path,” the central bank’s monthly state of economy report said.The report is prepared by RBI’s economic research wing, headed by Patra. RBI maintains that views expressed in both the papers are that of the authors.
RBI has paused in terms of repo rate changes in the last monetary policy meeting after raising the policy rate by 250 basis points since May 2022.
“Central banks the world over 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,” the state of economy report said.
In response to monetary policy actions and supply side measures, headline inflation measured by Consumer Price Index has gradually declined to 5.7% in March from its peak of 7.8% in April 2022, reflecting a 260 basis points reduction. CPI is projected to ease further to 5.2% in the fourth quarter in FY24.
Pertinent to note here what Governor Shaktikanta Das had said announcing the rate pause: “Our job is not yet finished and the war against inflation has to continue until we see a durable decline in inflation closer to the target.”
RBI is mandated to guide inflation to 4% with 2% of leeway on either side.