India’s retail inflation should reach the Reserve Bank of India’s target next year if there are no large and persistent shocks, Ashima Goyal, one of the three external members on the RBI's Monetary Policy Committee, told Moneycontrol in an exclusive interview.
“If there are no large and persistent shocks, the target should be reached next year,” Goyal said following the release of the minutes of the April 3-5 meeting of the MPC.
The RBI's objective is to achieve a medium-term target for Consumer Price Index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.
As per the RBI’s projection in the April monetary policy, CPI inflation in the second quarter of the current financial year is estimated at lower than its medium-term target. CPI inflation for FY25 is projected at 4.5 percent with Q1 at 4.9 percent, Q2 at 3.8 percent, Q3 at 4.6 percent, and Q4 at 4.5 percent.
Goyal said that ever since growth revived strongly, the MPC has been focusing on the inflation target.
“Inflation has been softening and credibly approaching the target, despite repeated supply shocks,” she said.
In March, India's headline retail inflation rate eased to a 10-month low of 4.85 percent, compared with 5.09 percent in February. At 4.85 percent, the latest headline retail inflation figure is the lowest since May 2023, when it came in at 4.31 percent.
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Geopolitical risks
Asked about the impact of new geopolitical tensions, Goyal said geopolitical risks continue but are similar to what they were during the last MPC meeting. Tensions seem to be settling down somewhat with an end to the strike, counter-strike pattern between Israel and Iran, she added.
On April 13, Iran fired over 300 drones and missiles at Israel, calling the attack a retaliation to a strike on its consulate in Syria, allegedly by Israel, earlier in the month. Tel Aviv, which said it would retaliate and "extract the price from Iran,” has called for tighter sanctions against Tehran.
Brent crude oil prices surged last week, posing a risk to the inflation trajectories of the RBI and other central banks. Currently, Brent crude oil prices were trading at $86.56 per barrel.
Rate cut, GDP growth
Goyal said India has shown considerable resilience to such tensions and other global shocks over the past few years. One reason was that macroeconomic policy was actively countercyclical and smoothed shocks.
“I expect similar resilience and focus on the domestic cycle in the future,” Goyal said.
Earlier, most experts expected the central bank to cut rates by August, but after increased geopolitical tensions, they are expecting a bit of delay. On the growth front, Goyal said India’s economic diversity, reforms and counter-cyclical macroeconomic policy are supporting growth.
"Diversity implies even if one sector is under stress, others continue to do well. Consumption should improve with rising consumer confidence and rural incomes. World and Indian exports are recovering, and all this should boost private investment and support growth,” she added.
Other MPC members on inflation
In the April monetary policy minutes, MPC member Rajiv Ranjan said while low core inflation would further the disinflation process, concerns remain on the outlook for food inflation. There is a need to remain watchful on upside risks from adverse climatic factors, supply-side shocks and geopolitical events.
RBI deputy governor Michael Debabrata Patra said recent inflation prints and high-frequency data on salient food prices indicate that food inflation risks remain elevated.
Further, RBI Governor Shaktikanta Das said lingering geopolitical tensions and their impact on commodity prices and supply chains are also adding to uncertainties in the inflation trajectory.
“These considerations call for monetary policy actions to tread the last mile of disinflation with extreme care,” Das said.
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