Meeting inflation target to remain work in progress till food prices fall: RBI

“The goal of aligning inflation with the target of 4 per cent will remain a work in progress as long as food prices pressure persists,” the Reserve Bank said in its latest monthly bulletin.

After the monetary policy committee was set up, the central bank has an inflation target of 4 per cent, with a leeway of 2 percentage points on either side. This will be up for review in September 2025.

The state of the economy article in the bulletin further said though many central banks have pivoted towards a less restrictive monetary policy stance in response to the fall in inflation in their economies, back home inflation still remains above the targeted level mostly because of the food prices.

Yet, the article notes that “headline inflation is gradually easing, driven by sustained softening of its core component, although the path of disinflation is interrupted by volatile and elevated food prices.”

For the eighth time in a row, the monetary policy committee of the Reserve Bank had on June 7 left the key policy rates unchanged at 6.5 per cent and reiterated its resolve to bring down inflation to the target on a durable period. The RBI also reiterated its stance of remaining focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

This was because the committee found the domestic economic activity remaining resilient and this had even the RBI increasing its GDP forecast by 20 bps to 7.2 percent for this fiscal.

“High frequency indicators of activity reflect a sustained momentum in manufacturing and services. The prospects for agriculture are brightening with the expectations of an above-normal SWM and the actual landfall ahead of its schedule. This should augur well for spurring rural demand and, in turn, support private consumption. The MPC also expected investment activity to be bolstered by strong balance sheets of banks and corporates, the policy emphasis on infrastructure spending, and rising business optimism,” the article said.

The RBI expects headline inflation to ease from 5.4 percent in 2023-24 to 4.5 percent in 2024-25, as it fears that prices will again spiral from the third quarter.

“Although headline inflation is gradually easing, driven by softening in its core component, the path of disinflation is interrupted by volatile and elevated food inflation which may cause it to reverse after a temporary fall below the target during the second quarter of 2024-25. Consequently, a resolute commitment to a durable alignment of headline inflation with the target will warrant careful monitoring of spillovers from food price pressures to core inflation and inflation expectations. This necessitates a continuation of the disinflationary stance,” it said.