RBI has locked target to reduce retail inflation to 4%: Shaktikanta Das

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Reserve Bank Governor is resolved to pare down retail inflation to 4%, the central bank’s governor Shaktikanta Das reiterated on Tuesday, adding they are prepared to tune policy responses when confronted with supply shocks that are becoming more frequent of late. Das made the remarks while delivering a speech on the ‘Art of Monetary Policy Making: The Indian Context’ at the Delhi School of Economics (DSE) Diamond Jubilee Distinguished Lecture when he outlined how inflation was stoked by the twin and almost back-to-back developments of the Covid pandemic and Russia’s aggression against Ukraine and turned formulating monetary policy into a formidable challenge. . Only last week, Prime Minister Narendra Modi described inflation as a matter of worldwide concern and said that central banks all over the globe are grappling with the problem and trying to coordinate between themselves on policy responses so that they could learn from the experience of other economies and come up with the optimum response for each society.

The retail inflation figures in July sprung a nasty – but not unexpected – shock to policymakers with a surge to 7.44% from a far sober 4.81% in June. This was the highest level since it reached 7.8% in April 2022. The rise in July was fuelled by high vegetable prices with the tomato standing out as the key villain. Calculations showed that vegetable prices alone contributed 200 points to the rise of retail inflation. The August numbers are yet to be made public, though most experts don’t expect a dramatic fall in the score.

During his lecture the RBI governor said the monetary policy framework in India has evolved in line with the developments in theory and country practices, the changing nature of the economy and developments in financial markets. The policy has laid emphasis on the key themes of inflation, growth and financial stability, though there has been some variation in the different policy regimes since 1947. He also referred to how RBI gradually raised key rates of interest by as much as 2.50 percentage points between May 2022 and February 2023.

Das also mentioned how the rise of key policy rates in India followed a smoother trajectory than some of the developed markets. “After a near-zero policy rate for a prolonged period, central banks in these (advanced) economies started raising interest rates aggressively in 2022, which contributed to stress in certain banks in these economies. In contrast, our battle against inflation is not constrained by financial stability concerns. In fact, even during the COVID phase, we continuously took measures to strengthen financial stability,” the governor remarked. “Our banking system remains resilient and healthy with improved capital ratios, asset quality and profitability,” Das added. One of the key elements in Das’s speech was that supply shocks have become more frequent in the recent years. Naturally, it impacted deeply inflation management inflation. “It is, therefore, important to remain vigilant and take necessary steps in a calibrated and timely manner to keep expectations firmly anchored… The Reserve Bank has been quick and calibrated while navigating through such turbulences. We look through fleeting shocks but remain prepared to undertake policy responses if such shocks show signs of persistence and getting generalised,” he said.

The RBI governor also mentioned that constant vigil was the watchword in the central bank’s lexicon, since monetary policy has to focus on containing the second-round effects. “We will remain watchful of this also. The role of continued and timely supply-side interventions, as being undertaken by the government, assumes criticality in limiting the severity and duration of such food price shocks… In these circumstances, it is necessary to be watchful of any risk to price stability and act timely and appropriately. We remain firmly focused on aligning inflation to the target of 4%,” Das added.

Das outlined how low and stable inflation helps households and businesses in planning for long-term savings and investments. It leads to innovation, productivity and sustainable growth in the long term, he mentioned. High and volatile inflation badly impacts the economy by affecting productivity and long-term growth. Inflation is also the worst and disproportionate form of “tax” that the poor have to live with.

RBI has been asked to follow a retail inflation band between 2% and 6%, though the central bank is firmly committed to lead it to the mean 4%. The government and central bank in consultation fix the tolerance band and is reviewed every five years.