Inflation shadow on rate cut remains
With rate cuts in the US becoming increasingly unlikely this year, RBI will have one more reason to postpone its monetary easing.
India’s benchmark inflation number, as measured by the Consumer Price Index (CPI), was flat between March and April 2024, at 4.85% and 4.83%, respectively. The April inflation print is in line with most institutional forecasts. Even beyond the headline numbers, little has changed in the larger inflation picture between March and April. Core inflation — it measures the non-food, non-fuel part of the inflation basket — continues to decline and has reached its lowest ever level of 3.25% in the current series. At 8.7%, food inflation continues to be the biggest driver of overall inflation. What does all this mean for the economy and policy at large?
RBI’s Monetary Policy Committee has repeatedly underlined that a sustained decline in food inflation is essential for the headline number stabilising at RBI’s target of 4%. While there is little the central bank can do through monetary policy tools to bring down food inflation, it has been helped by a proactive approach to the fiscal policy of the government. The extent and efficacy of such interventions will depend on the severity (or lack) of supply shocks in food markets and the political feasibility of such interventions. The government withdrawing its ban on onion exports during elections in Maharashtra is one such example.
It would be wrong to assume that all the monetary policy action is being driven by trends in food inflation. With rate cuts in the US becoming increasingly unlikely this year, RBI will have one more reason to postpone its monetary easing. Whether a prolonged high interest rate environment is eating into India’s potential growth is a question which is bound to resurface in the next MPC meeting in June. But with growth numbers looking good for now, the answer is likely to remain the same.
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