Will RBI change focus to growth after PM Narendra Modi's speech?

While the central bank has not hiked the repo rate for more than a year now, but it has refused to drop the guard on inflation even if core inflation has moderated

The Reserve Bank of India (RBI), which has focused on growth over inflation for almost two years now, may find it difficult to drop its guard on price rise even if Prime Minister Narendra Modi called for making growth a top priority.

“This decade will lead this institution to its centennial year. And this decade is equally important for India’s developmental journey. As your mantra is -- the RBI should give top priority to rapid growth while focusing equally on trust and stability,” Modi said on Monday at an event to commemorate 90 years of the RBI.

His comment comes ahead of the Monetary Policy Committee (MPC) meeting, which starts on Wednesday.

The central bank turned its focus on inflation after the Russian invasion of Ukraine in February 2022 as supply-side constraints put upward pressure on prices. Between May 2022 and February 2023, the six-member MPC increased the policy repo rate by 250 basis points to 6.5 per cent. Despite the sharp increase, the RBI failed to achieve its inflation mandate and the average inflation rate stayed above 6 per cent for three consecutive quarters in 2022.

While the central bank has not increased the repo rate for more than a year now, it has refused to drop its guard on price rise even if core inflation has moderated.

Headline inflation, measured by year-on-year changes in the all-India consumer price index (CPI), remained unchanged at 5.1 per cent in February 2024 as the positive momentum of around 15 basis points was fully offset by favourable base effects.

The core inflation rate eased to 3.4 per cent in February from 3.5 per cent in January -- its lowest level in four years. Moderation was across all sub-groups.

The RBI has been focusing on bringing down the inflation rate to the target, which is 4 per cent. According to the latest “State of the Economy” report of the RBI, the winter easing of vegetable prices turned out to be shallow and short-lived and headline inflation’s momentum turned positive in February 2024.

“…monetary policy has to remain in a risk-minimisation mode, guiding inflation towards the target while sustaining the momentum of growth,” the report said.

The central bank’s resolve to bring inflation to the target is also evident from the fact that it has maintained the “withdrawal of accommodation” stance, which essentially means monetary policy is still accommodative, and hence there is need to withdraw from such accommodative policy.

In this context, RBI Governor Shaktikanta Das had said in the February policy the stance was with respect to rates and that monetary transmission was still incomplete.

“Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4 per cent and our efforts to bring it back to the target on a durable basis,” Das had said.

According to economists, the stance may change only after the RBI is satisfied inflation will be around the target on a sustainable basis.

The RBI has projected the CPI inflation rate for 2024-25 at 4.5 per cent with Q1 at 5.0 per cent, Q2 at 4.0 per cent, Q3 at 4.6 per cent, and Q4 at 4.7 per cent.

“The RBI should not prioritise growth at any point in time. Growth is not the function of the RBI. Its function is stability -- macro stability, financial market stability, and inflation management,” said Indranil Pan, chief economist, YES Bank.

While the market has factored in the status quo on both the repo rate and the policy stance, one member of the MPC, Jayanth Varma, had voted in favour of changing the stance to neutral in the February policy.

“In my view, the time has come for the MPC to send a clear signal that it takes its dual mandate of inflation and growth seriously.”