Inflation is arguably one of the most recognized terms in economics. Its impact has been deep, causing extended periods of instability in numerous countries. Central bankers often strive to earn the reputation of being "inflation hawks," indicating their vigilance in controlling inflation. Politicians have frequently campaigned on promises to curb inflation, sometimes gaining office but then losing it due to their failure to manage it effectively. In 1974, President Gerald Ford even categorized inflation as Public Enemy No. 1 in the United States. But what exactly is inflation, and why is it so significant?
Inflation refers to the rate at which prices increase over a specific period. Generally, it is a broad measure that encompasses the overall rise in prices or the increase in the cost of living within a country. However, inflation can also be more narrowly calculated for particular goods, such as food or services, like haircuts. In any context, inflation indicates how much more expensive a relevant set of goods and/or services has become over a certain period, typically a year. Understanding inflation and its measurement is crucial because it affects every aspect of the economy, influencing economic growth, consumer confidence and overall financial stability.
Recent Inflation Trends in India: RBI's Response to Rising Inflation
In February 2023, the Reserve Bank of India (RBI) raised the benchmark repo rate by 25 basis points bringing it to 6.50%. RBI Governor Shaktikanta Das explained in his post-Monetary Policy Committee (MPC) announcement that this rate adjustment was necessary to address inflation while maintaining a co-operative stance. The MPC has often cited inflation as a key reason for increasing rates in its evaluations.
Inflation Projections
Governor Das expects that inflation will decline in 2023–2024, although it is still expected to stay above the RBI's target of 4%. Specifically, inflation is projected to average 5.6% in the fourth quarter of 2023–2024. In terms of economic growth, the RBI forecasts a real GDP growth rate of 6.8% for 2022–2023 and 7.1% for the first quarter of 2023–2024.
Factors Influencing Inflation
The future trajectory of inflation will be significantly influenced by the prices of domestic goods such as vegetables, cereals, and spices. The RBI has previously linked the mismatch between supply and demand for goods and services which poses risks to GDP growth, to several factors: the COVID-19 pandemic, geopolitical tensions and a weakened Indian rupee.
RBI Governor's Cautious Approach to Inflation
- Emphasis on Inflation Monitoring: The Reserve Bank of India (RBI) Governor, Shaktikanta Das, recently reiterated the central bank's vigilant stance on inflation by highlighting that any potential reductions in interest rates would depend on consistent inflation stability. Speaking at the post-monetary policy press conference, Governor Das used the metaphor of an "elephant" to describe the slow pace of inflation decline, emphasising the RBI's cautious approach.
- The Slow Pace of Inflation Decline: Governor Das explained that inflation, compared to an elephant is decreasing very gradually. He noted the current inflation rates, mentioning it is around 4.9 to 4.8 percent down from 5 percent. However, the RBI's target is to bring inflation down to 4 percent and crucially, to maintain it at that level. "The elephant (Inflation) is walking very slowly, and we are watchful about this," Das remarked, emphasizing the central bank's goal of achieving and stabilizing the inflation rate at 4 percent.
Long-term Stability Before Policy Changes
Governor Das highlighted the importance of not only reaching the inflation target but also ensuring that it remains stable over an extended period before considering any changes in monetary policy. This emphasises the RBI's commitment to a cautious and measured approach to managing inflation.
Future-Inflation Projections
The RBI has projected that inflation will decrease to 3.8 percent in the second quarter of FY25 but is expected to rise again to 4.6 percent in the third quarter and 4.5 percent in the fourth quarter of FY25. These projections reflect the central bank's ongoing efforts to closely monitor and manage inflation trends.
Commitment to Price Stability
The RBI's inflation target of 4 percent signifies its dedication to maintaining price stability. Governor Das's comments and the central bank's projections illustrate a careful and strategic approach to monetary policy, aimed at achieving long-term economic stability while being prepared to act if inflation deviates from the desired path.
Inflation Decline: A Cautious Approach by RBI
- Gradual Decline in Inflation Rates: Recent inflation data reveals a slow yet steady decline, with current rates moving around 4.9 to 4.8 percent, slightly down from previous levels of 5 percent. Despite this positive trend, RBI Governor Shaktikanta Das has emphasized the need for careful monitoring. The central bank is focused on ensuring that inflation not only continues to decrease but also stabilizes at or below the target level.
- Caution in Policy Adjustments: Governor Das made it clear that any potential changes in monetary policy including interest rate cuts would only be considered once inflation is reliably stable within the RBI's target range. "Only being sure of its stability within our targets then only we will think about change in our monetary policy, I won't say that a cut in the rates," he stated. This cautious approach emphasizes the RBI's commitment to long-term economic stability over short-term adjustments.
Prioritising Long-term Stability
Das’s remarks suggest that the RBI is focusing on long-term stability rather than immediate benefits. The central bank prefers a conservative, data-driven policy response. This means any decision to alter interest rates will be supported by consistent and sustained improvements in inflation indicators.
Challenges and Hopes
The RBI's careful stance comes amid global economic uncertainties and domestic challenges. The central bank is particularly hopeful that a normal monsoon season will help ease food inflation. Inflation in India is influenced by various factors including global commodity price fluctuations, supply chain disruptions and domestic economic policies.
Maintaining Price Stability
The primary goal of the RBI is to maintain price stability which is essential for the promotion of economic growth and boosting consumer confidence. Governor Das’s metaphor of the inflation "elephant" moving slowly but steadily highlights the central bank's vigilance and the complexity involved in managing inflation in a dynamic economic environment. The RBI’s approach reflects a strategic balance between monitoring inflation trends and ensuring economic stability by demonstrating a preference for careful and data-based policy decisions.
. . .
References: