Monetary Policy Is At Work, Substantial Disinflation Achieved: RBI Bulletin

Monetary policy is at work. Substantial disinflation has been achieved, but the road to be travelled stretches ahead till inflation declines to the target of 4 per cent, said an article published in RBI's latest Bulletin. The government has mandated the Reserve Bank of India (RBI) to ensure retail inflation based on the Consumer Price Index (CPI) remains at 4 per cent with a margin of 2 per cent on either side.

Inflation during January-February 2023 exceeded the upper tolerance limit of 6 per cent after a transitory respite during November-December 2022. The central bank, which effected six back-to-back hikes in the key short-term lending rate (repo) since May 2022 to check high inflation, decided to pause early this month. The cumulative rate hike since May 2022 is 250 basis points.

The retail inflation in March fell to a 15-month low of 5.66 per cent and came back to the Reserve Bank's comfort level of 6 per cent. The article authored by a team led by RBI Deputy Governor Michael Debabrata Patra noted that the global economic conditions are beset by heightened uncertainty as financial conditions remain volatile and financial markets are on edge. 

In India, aggregate demand conditions remain resilient, supported by a rebound in contact-intensive services. Expectations of a bumper rabi harvest, the fiscal thrust on infrastructure, and the revival in corporate investment in select sectors augur well for the economy, it said.

"Monetary policy is at work. Substantial disinflation has been achieved, but the road to be travelled stretches ahead till inflation is at or close to the target of 4 per cent," said the article titled 'State of the Economy' published in RBI Bulletin April 2023.

In response to monetary policy actions and supply side measures, the authors said headline CPI inflation has gradually declined from its peak of 7.8 per cent in April 2022 to 5.7 per cent in March 2023 and is projected to ease further to 5.2 per cent in the January-March quarter 2023-24.

The article further said that in time, enduring price and financial stability will strengthen the foundations of the economy and provide a fillip to growth. Central banks across the world that are invested with dual mandates are at a fork in their course. The RBI has taken the road that is less travelled by, balancing and calibrating both actions and pace, the article said.