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For central bankers, price stability is a dream come true and they would do anything to make that happen. If you were Jerome Powell, Chairman of the US Federal Reserve, you would coerce, cajole, and confuse the markets until you achieve price stability -- the Fed’s tactical game right now is to keep markets guessing aka confuse.
But for Shaktikanta Das, Governor of the Reserve Bank of India, the final fight to bring inflation down to the desired 4 percent is turning out to be easier than thought. For starters, the RBI has projected the headline consumer price index inflation to be 4.5 percent for FY25, just a shade higher than the desired target. It has also projected gross domestic product (GDP) growth to be 7 percent. Had it not been an inflation targeting central bank, this combination of low inflation and reasonable growth would have already made the RBI cut policy rates to bring back the economy to that coveted potential growth rate -- which now is agreed to be 8 percent.
For now, Das is content with using a pachyderm as a metaphor for inflation. “Two years ago, around this time, when CPI inflation had peaked at 7.8 percent in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” Das said in his statement today.
Now, metaphors are all good -- and exciting for media -- but they are also tricky. There is a thing or two about elephants that we need to know. These pachyderms are slow moving and are known to take occasional long stops. Does the governor believe that the last leg of inflation would be slow to fall? If so, markets must push back their rate cut expectations. Indeed, the projection of 4.5 percent for FY25 clearly removes the need for rate cuts. After all, if the desire is 4 percent, the RBI has no reason to cut rates until it reaches and it believes it won’t reach there this year.
Indeed, at the post policy media meet, Das dodged a direct question of whether the RBI would fulfil the market’s expectations of rate cuts this year. “I cannot give you a forward guidance on rate cuts…”
But Das, in his policy statement, appears more satisfied than before about the inflation trajectory. He notes that core inflation has steadily fallen. Food inflation continues to be a bugbear, but record rabi output and a normal monsoon should fix this, according to the RBI. All we need to do is ride the heat waves that the summer has brought about.
A benign core and well-behaved food inflation means that the elephant has left the room. That said, central bankers know how hard it is to chase an elephant because these are stubborn. What is worse is getting chased by an elephant!
Perhaps this is what Das wants to avoid at all costs, a resurgence of inflation or in other words generalisation of food inflation. Deputy Governor Michael Patra explained this concern. “Indications are that in view of adverse climate events recurring, it (food inflation) will remain high. The actors keep shifting,” said Patra in a post-policy media meet. “What we are worried about is that there should not be spillovers to the rest of the CPI.”
Then there is the recent rise in crude oil prices. The fuel component has been benign, and this could soon turn now.
Markets had expected a marginal cut in inflation forecast after recent data or even a softening of the stance. Instead, the RBI stood unmoved in its efforts to reach 4 percent. Understandably, markets have turned a cold shoulder to the RBI’s decision. Bond yields were largely unmoved and interest rate sensitive stocks lost some steam.
The elephant has left the room, but will it be replaced by animal spirits?
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Moneycontrol Pro
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