Indian year-on-year retail inflation eased from 4.7% in April and 5.7% in March to 4.3% in May, giving extrapolators hope that our central target of 4% is within reach of a few weeks. In turn, this has advocated a policy pivot towards easy money after a rate-hardening cycle of 250 basis points by the Reserve Bank of India (RBI) over the past year. However, it is wise to take the RBI “pause” seriously. In other words, we should not expect any premature action on the monetary front. As if to calm expectations, RBI Governor Shaktikanta Das said in a speech on Tuesday that the country’s deflation process is likely to be “slow and long”, with 4% at best as a mark where we see recent signs of softening. Will only take a hit in the medium term though. For the current financial year, RBI has projected consumer price inflation at 5.1%. This figure not only captures the vagaries that prices are subject to, but also justifies the need to remain in a wait-and-see mode as the gradual effects of past policy actions unfold. However, Pivot hopefuls should hold their horses for a more important reason.
Whether inflation targeting works in an economy like ours has been a matter of debate before it was adopted in 2016, and while the RBI failed to keep price increases at 6% for three back-to-back quarters in 2022, since The central bank had a strange chance to prove the skeptics wrong, by showing that it could do the job assigned to it. In this context, the fact that Das outlined the rationale for going after our core cost-of-living index can be taken as a sign of confidence. “We believe that financial turbulence is more likely if there is no price stability,” the governor said in his speech, “reinforcing our belief in the complementarity of monetary policy and financial stability over the long run.” In summarizing the functions of the RBI in this way, Das has drawn due attention to a fundamental aspect of the central bank’s mandate. For money to serve its primary purpose, its value must remain stable over a long period of time; And to the extent that a loss of purchasing power is inevitable, it should only happen along a path that is both gradual and predictable. Once this is ensured and the RBI’s inflation control tools are found to be effective, the risk appetite for inflation affecting nominal finance will fall, reducing the premium charged by lenders to cover that risk. will be given, as well as help borrowers to better assess their financial needs and plan ahead. , Eventually, continued success on price stability will calm general price expectations and reduce the cost of capital in the economy. Low volatile rates of interest will lead to relatively stable operating conditions for businesses large and small, with little chance of financial shocks. Achieving all this requires our patience, while the RBI is shrewd in its approach.
What about the reason for accelerating economic growth? India’s post-pandemic performance has been satisfactory, with an expansion of 7.2% recorded in 2022-23 and expected to exceed 6% this year. Even so, credit growth. At 6.5%, the RBI’s key policy rate is not very tight in real terms (adjusted for projected inflation, that is). Certainly, as we move forward, our economy needs to expand rapidly. For this, however, we should not rely on cheap loans as motivation, but rely primarily on business investments that promise real returns to beat the inflation-adjusted cost of available funds. In a rapidly growing economy, the call for investment must arise from a market opportunity – with a stable financial environment as an enabler.
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Updated: June 15, 2023, 01:23 AM IST