Inflation moderating, steadily moving towards 4% target: RBI governor Das

The Reserve Bank of India (RBI) governor, Shaktikanta Das, said on Tuesday that retail inflation is slowly moderating and is steadily moving towards the target of 4 per cent.

During a fireside chat at the World Economic Forum in Davos, Das stated that core inflation has started to move down, which gives confidence that monetary policy is working, while commenting that maintaining financial stability despite multiple headwinds has been the biggest achievement in the last five years.

“The last print for inflation, for December, which came out just last week, the [CPI] inflation has come at 5.7 per cent. There is a lot of base effect on that. But it is gradually sort of moderating. It has started moderating. It is steadily moving towards the target of 4 per cent,” said Das.

Indian laws have set the inflation target for the RBI at 4 per cent, with a 2 per cent variation on both sides.

After increasing the key policy rates by 250 basis points to 6.5 per cent between May 2022 and February 2023, the central bank paused in the next five policy review meetings. The next monetary policy review is scheduled in February.

“Inflation is something which is difficult to predict because it is subject to so many international developments and weather events… But if you look at the core inflation, which is actually I should say a measure of the efficacy, the effectiveness of monetary policy, the core inflation, which at one point, the core part of the inflation, that is non-food, non-oil, had touched 6.1 per cent and it was remaining sticky at 6 per cent for quite some time, that has started steadily coming down. The latest inflation event, the core inflation is 3.8 per cent. So it gives a positive feeling and the confidence that monetary policy is working,” he added.

He said that food inflation can be volatile and will be on top of the central bank’s agenda. The headline inflation stood at 5.69 per cent in December, which was below economists' expectations of 5.9 per cent.

The Governor further said that bringing financial stability to India in the last five years is the biggest achievement of the central bank. Das was appointed as governor of the Indian central bank in 2018 for three years, and his term was extended for another three years in 2021.

He said that the current state of governance within banks has undergone a complete transformation, due to the innovative financial architecture implemented to govern both private and public sector banks. This reformation extends beyond traditional banking institutions, encompassing non-bank finance companies, and is intricately woven into the regulatory fabric of digital lending through the issuance of comprehensive guidelines.

“The entire governance system in the banks is today completely transformed because of the new financial architecture we have put in place with regard to the governance of both private and public sector banks. The regulatory architecture around NBFCs, and the digital lending, we issued digital lending guidelines. So I think all these are the building blocks and they are providing the required foundations for the belief in the fact that India's growth momentum will be maintained in the future. And when I say that I see durable signs of India's growth momentum in the banking, it is based on a lot of in-house research and analysis,” he said.

Das expressed reservations about the speculative nature of cryptocurrencies and their potential risks to financial stability, citing concerns related to money laundering and terror financing. Responding to the comparison of cryptocurrencies to the Tulip Mania, the Governor expressed his skepticism about the current trajectory of cryptocurrencies. The lack of underlying assets and the potential to become part of the payment system raised concerns. Despite acknowledging the potential of blockchain technology, he cautioned against the speculative nature of cryptocurrencies.

The Governor dispelled the claim that there has been a nod from some central banks to have 2 per cent of their reserves in Bitcoin. He stated that he was not aware of any major economy or emerging market economy that had made such a decision during the meetings of central bank governors held every two months. He underscored the importance of assessing risks independently and adopting strategies aligned with each country's circumstances.

Das said that the current scenario presents an opportune moment to attract foreign investments. The resilience demonstrated during challenging times has generated substantial interest from external investors. It signifies a growing recognition of India's stability and financial robustness, making it a favourable destination for those seeking long-term investment opportunities.