As inflation seems to be easing, RBI's Monetary Policy Committee should wait and watch

Recent data released by the National Statistical Office (NSO) on Friday has shown retail inflation falling down to the 18-month low of 4.27 per cent in April. Despite acknowledging the favourable base effect and moderation of food prices resulting in the lower inflation rate, the number is still relieving for the Reserve Bank of India, Monetary Policy Committee (MPC) and ordinary people as well. But what is concerning is another data released by the same organisation which shows factory output coming down to a five-month low of 1.1 per cent in March, with weak manufacturing, electricity and consumer durable output, clearly showing a lack of demand. Demands are the foundation of any market-based economy, particularly which is in Rostow’s “drive to maturity” stage, like India. They control the whole process of production and consumption. And, central to all this is believed to be the monetary policy of that economy. In its last meeting in April, the MPC kept the benchmark repo rate unchanged at 6.5 per cent, which remains the highest in four years! The committee had hiked the rate by 250 basis points between May 2022 and February 2023. Meanwhile, inflation seems to be humbling, the consumer food price index has come down to 3.84 per cent, with prices of vegetable, oils, meat and fish etc coming down, however, prices of pulses, cereal and milk continues to be concerning. Also, core inflation, which includes goods and services excluding fuel and food, is believed to have declined as well. Here it needs to be mentioned that this is the second time the retail inflation (at 4.27 per cent) has been under the tolerance limit of RBI (6 per cent) and has come closer to the targeted 4 per cent under the 2016 amendment of RBI Act, 1934. So should we believe that inflation is nearly tamed and the cycle can be reversed when the MPC meets next in early June? First of all, it has to be noted that inflation has a disproportionate impact on the poor as the prices of commodities rise equally for everybody concerned. Furthermore, the income divide post-pandemic has been ever wider, Gini Coefficient for India at the end of 2021 was 82.3, which was the second highest as compared to the other major fast growing economies of the world. Also, this year the probability of El-Nino is high, which may affect the monsoon rains, which in turn could undo the gains made by a decline in inflation. Furthermore, as retail inflation rates were earlier higher than the tolerable bracket, actual pricing of the commodities might still be heavy on the pocket despite the inflation rate being “tolerable” now. As late as February 2022 the CPI rate was beyond 6 per cent mark. However, as no disinflation is non-painful, rate hikes lead to a compromise with growth potential. But it should also be seen that the RBI Governor and ex-officio chairman of MPC Shaktikanta Das has been confident about the Indian economy growing close to 6.5 per cent (in real terms) for the year 2023-24. Further, it should also be maintained that despite the revision of the rate, the World Bank predicts India’s GDP growth rate to be 6.3 per cent, while the  IMF expects it to be 5.9 per cent for the aforesaid period. This is much higher than the global average of 3.0 per cent, predicted by the IMF’s World Economic Outlook report. So, it can be said that the committee has a policy space to properly balance the proportion of growth and inflation, but the situation is still uncertain. Having said that, the committee can adhere to its prime responsibility of inflation targeting but should not raise the repo rate in the June meeting, it has space to keep the rate unchanged for this meeting. Things may be better clear in August and even clearer in October when again the MPC can decide on the course. Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.