RBI's New Monetary Focus: Growth and Disinflation Ahead

With retail inflation nearing the RBI's 4% target, monetary policy must prioritize growth, said MPC member Jayanth R Varma. CPI inflation is projected to be only 0.5 percentage points above target in 2024-25, with steady disinflation ahead. A shift to less restrictive policies is necessary to support economic growth.

With retail inflation nearing the Reserve Bank of India's (RBI) target of 4 percent, a shift in monetary policy to promote growth is imperative, according to Jayanth R Varma, a member of the Monetary Policy Committee (MPC).

Varma indicated that CPI inflation for 2024-25 is projected to hover just 0.5 percentage points above the target and described core inflation as 'extremely benign.'

'The protracted period of intolerably high inflation is coming to an end,' Varma told PTI. 'Over the next few quarters, we will see further disinflation and inflation will reach the 4 percent target on a sustained basis.'

Highlighting the trade-offs, Varma noted that the fight against inflation has dampened growth prospects. While the economic growth rate for 2024-25 is poised to be 0.75-1 percentage points lower than the 8.2 percent growth in 2023-24, India's potential growth hovers around 8 percent.

Earlier this month, the RBI projected a GDP growth rate of 7.2 percent for FY25. 'Against this backdrop, monetary policy must transition from a single-minded focus on inflation to balancing it against growth,' the MPC member emphasized. 'We need a less restrictive monetary policy that maintains a steady pace of disinflation while supporting growth.'

Varma warned that growth forecasts for 2025-26 are similar to those for 2024-25, resulting in a prolonged growth sacrifice of 0.75-1 percentage points over two years.

He praised governmental policy measures such as digitalization, tax reforms, and increased infrastructure investment for boosting potential economic growth to 8 percent.

In its most recent meeting, the RBI left the key interest rate unchanged at 6.5 percent for the eighth consecutive time. The central bank forecast CPI-based retail inflation to settle at 4.5 percent for FY25, with quarterly projections varying between 3.8 percent and 4.9 percent.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)