Mahatma Gandhi fought many battles, but probably not one against inflation.
In his bi-monthly addresses detailing the decisions of the Monetary Policy Committee (MPC), Reserve Bank of India (RBI) governor Shaktikanta Das has repeatedly quoted inspirational figures such as Gandhi, given the uncertain times we live in. On June 8, the central bank chief went one step further and enrolled the father of the nation to help in the RBI's fight against inflation.
"…(inflation) being within the tolerance band is not enough. Our goal is to achieve the target of 4 percent, going forward. As Mahatma Gandhi had said 'The ideal must not be lowered', " Das said.
The RBI's inflation target has been a hotly-debated subject over the pandemic years, with the MPC seemingly content with headline retail inflation staying within the tolerance band of 2-6 percent—rather than at the medium-term target of 4 percent—as it loosened monetary conditions to boost growth. But with the Indian economy back on track, the central bank's focus is now on returning inflation to its ideal—4 percent.
In his address on June 8, Das was only expanding on what the MPC's statement said — Consumer Price Index (CPI) inflation was expected to be above 4 percent in 2023-24, "warranting continuous vigil". It went on to add that the committee will act further, if needed, to bring inflation down to the target.
"We think that this resolve to do 'whatever is necessary' to bring inflation down on a sustained basis to the median target is likely to push forward rate cut expectations that some sections of the market had started pricing in for as early as October," HDFC Bank's economists said in a note.
The RBI's tactic seems to have worked.
"Today's statement was in a way hawkish at the margin and we no longer foresee a rate cut in October-December. The earliest possible cut has now shifted to February 2024," said Bank of Baroda economist Sonal Badhan.
Pivoting to a cut
Forecasts of growth slowing sharply in 2023-24 have been behind the chatter about the RBI cutting interest rates in 2023. As per the central bank's own projections, Gross Domestic Product (GDP) growth is seen falling from 8 percent in the first quarter of 2023-24 to 5.7 percent in the last quarter.
Of course, base effects continue to play a role.
Exactly when the RBI will pivot from a prolonged pause to cutting rates is anybody's guess but economists are increasingly of the opinion that a window of opportunity may open up in early 2024.
"With GDP growth in 2023-24 set to decline from 8 percent in Q1 to 5.7 percent in Q4, we pencil in the first rate cut by RBI in January-March 2023-24. The magnitude could be larger than 25 basis points," Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, said.
Not only would growth have fallen sharply by early next year—at least as per the RBI's forecasts—but headline retail inflation is also expected to cool to 5.2 percent.
But what will the inflation outlook be like in early 2024? After all, monetary policy must be forward-looking and interest rate decisions can't be made on the basis of current readings.
As per the RBI's six-monthly Monetary Policy Report from April, CPI inflation is projected at 4.4 percent in January-March 2025. For a central bank that has seen inflation stay above its 4 percent target since September 2019, a one-year-ahead inflation forecast of 4.4 percent will be rather comforting. But only time will tell if it will be "enough" to cut rates.
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