MUMBAI: Hinting that interest rates in India may remain higher for longer, Reserve Bank of India (RBI) governor Shaktikanta Das has said the disinflation process is likely to be slow and protracted. He said convergence to the inflation target of 4% may be achieved only over the medium term.
“The cumulative impact of our monetary policy actions over the last one year is still unfolding and yet to materialise fully. While our inflation projection for the current financial year 2023-24 is lower at 5. 1%, it would still be well above the target,” said Das. He was delivering the plenary address at the Central Banking Summer Meetings in London on Tuesday.
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The governor’s statement comes at a time when India’s retail inflation for May eased to a 25-month low of 4. 25%, below estimates of 4. 4%. The possibility of the US Fed pausing its rate hike has increased after the inflation outlook improved.
Das stated that to evaluate the consequences of previous measures, the RBI opted for a pause during the April and June 2023 meetings, making it clear that this was not a ‘pivot’. The RBI’s monetary policy committee (MPC) acknowledged the inherent risks associated with offering explicit guidance during a tighteningcycle and, as a result, refrained from providing any future indications regarding the timing and magnitude of the terminal rate, Das said.
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Explaining why the central bank tolerated inflation beyond the 4% level during the pandemic, Das said the government has mandated the RBI to ensure growth, because of which India has a ‘flexible inflation targeting’ regime.
“Given our population and large addition to the workforce every year because of the ‘demographic dividend’, we cannot be oblivious to growth concerns. Hence, we prioritised growth during the pandemic even as inflation remained above the target but within the tolerance band,” said Das.
He added the key lessons from managing multiple crises in the last three years were the need to be proactive and nimble and ensure that measures are targeted and calibrated. “We backed upour monetary policy actions by appropriate regulatory and supervisory measures, including macro-prudential instruments, that reinforced the policy impact and its credibility and provided guidance through communication,” said Das. Given that RBI has forecast inflation to be above the 5% level this current fiscal, most analysts are forecasting that rate cuts will happen only in the next fiscal, or earliest by the fourth quarter of FY24.
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“We expect one more pause by the RBI MPC meeting in August, while carefully watching the CPI and core CPI number in ongoing months. While we rule out a rate cut any time soon, we pencil in the first rate cut by RBI in Q4FY24. The magnitude could be larger than 25bps (100 basis points = 1 percentage point),” said Soumya Kanti Ghosh, chief economist at SBI Group.
