RBI Bulletin: With retail inflation below 6%, first milestone of monetary policy is passed

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With retail inflation falling below the 6 percent upper band in recent months, the first milestone of India's monetary policy committee (MPC) is passed, the Reserve Bank of India (RBI) monthly bulletin released on January 19 said.

Subsequently, India's economy has seen improvement in macroeconomic stability with inflation being brought into the tolerance band and lead indicators suggesting current account deficit on course to narrow, according to the January Bulletin.

"Macroeconomic stability is getting bolstered with inflation being brought into the tolerance band and lead indicators suggesting that the current account deficit is on course to narrow through the rest of 2022 and 2023," the RBI Bulletin added.

According to the Bulletin,  recent data arrivals indicate that the first milestone of monetary policy is being passed– bringing inflation into the tolerance band.  "The objective during 2023 is to tether inflation therein
so that it aligns with the target by 2024 – the second milestone," the Bulletin said.

These observations are critical as markets are eagerly awaiting for future policy cues from the central bank. RBI bulletin doesn't represent the views of the central bank but offers some insights into the thinking on various aspects of economy and policymaking.

The monetary policy committee (MPC) has hiked the key repo rate by 225 basis points since May last year to control inflation. One bps is one hundredth of a percentage point. There is an expectation that the MPC may pause going ahead.

After staying above the 2-6 percent band for most part of 2022, retail inflation started falling below 6 percent upper band in the last two readings, offering some comfort to the policymakers. Under the rule, the MPC needs to keep inflation at a 4 per cent target with an error margin of 2 per cent on either side.

India's headline retail inflation rate eased to a one-year low of 5.72 percent in December from 5.88 percent the previous month, data released on January 12 by the ministry of statistics and programme implementation showed.

At 5.72 percent, the latest Consumer Price Index (CPI) inflation print is below the consensus estimate.

This is the third month in a row that CPI inflation has fallen. It is also the second month in a row that it has come in lower than the upper bound of the Reserve Bank of India's (RBI) 2-6 percent mandate.

While a slowdown in growth with possibilities of recession in large swathes of the global economy has become the baseline assessment, emerging markets are appearing more resilient than in the year gone by, but their biggest risks in 2023 stem from US monetary policy and the US dollar, the RBI Bulletin said.

Economy on course to $5 trillion in 2027?

According to the Bulletin, the year 2023-24 may see deceleration in real  GDP growth from 7 percent in 2022-23 to 6.5 percent as projected in the RBI’s monetary policy report of September 2022.

At current prices and exchange rates, therefore, India will be a $3.7-trillion
economy in 2023, maintaining its lead over the UK as the fifth largest economy of the world. According to the IMF’s calculations, India will move into fourth place in 2025 and into the third place in 2027 as a $5.4-trillion economy, the Bulletin noted.

Also, a favourable demographic dividend supports the India story, the Bulletin said.

"In closing, 2023 may well be the opening ajar of a window in which India’s time on the world stage is arriving," the Bulletin said.

In April 2023, India’s population will be the largest in the world, projected at 1.4 billion and a sixth of the increase of the world’s population of working
age people between 2023 and 2050 will be Indians, the Bulletin said.

"Coupled with a median age of 28, this is India’s chance to seize the demographic dividend and herald its emergence as an economic powerhouse of the future," said the Bulletin.