Sceptics turn supporters as RBI proven right on inflation

Just two months ago, market analysts and corporates worried that the Reserve Bank of India was being too cautious in its assessment on inflation. Some argued that with headline retail inflation comfortably below the Monetary Policy Committee’s upper tolerance limit of 6%, perhaps it was time for a change in stance - or even a rate cut - sooner than later.

But the recent surge in prices of essentials like tomatoes, pulses, spices and cooking oils, and persistent international energy supply chain issues, have proved that Governor Shaktikanta Das and the RBI were prescient in their assessment that the fight against inflation is not over yet. On Thursday, the same analysts and economists wholeheartedly welcomed the latest MPC decision to continue holding key interest rates.

“The RBI policy communication is nuanced, and has rightly exercised caution and warranted vigil on the inflation trajectory given the current jump in vegetable prices. With capacity utilisation currently running higher than the long-term trend, the central bank does have the bandwidth to look through the current increase in food prices,” said Dinesh Khara, Chairman of State Bank of India.

“The message from the policy was clearly hawkish in response to the rising inflationary risks. This was reflected in both the significant upward revision in RBI’s inflation forecast and the decision to introduce 10% incremental cash reserve ratio for banks,” said Abheek Barua, Chief Economist, HDFC Bank.

The RBI raised the headline inflation outlook for the current financial year (FY24) to 5.4% from 5.1%. The continuation of the ‘accommodative stance’ was near unanimous, which was a change from a few previous MPC meetings, wherein the external members wanted a more proactive stance, while the RBI members wanted the focus to remain on inflation.

“Hardening global food prices and higher crude oil prices could pose a risk to containing inflation. Monsoon distribution and possible El Nino impact will also be keenly monitored,” said Mohit Ralhan, CEO of TIW Capital.

All analysts and industry leaders believe that the current spike in inflation is transitory in nature. But they all have bought into Governor Das’ statement that the RBI will continue being vigilant, especially given that it now sees July-September quarter inflation at 6.2%.

“Monetary policy will look through the inflation surge which is expected to be temporary as monsoon distribution has improved. That said, RBI remains ready to act if inflation pressure shows signs of generalisation,” said Gaura Sengupta, India Economist, IDFC First Bank.

“The governor sounded cautious over upside risks to inflation from elevated food prices, as well as the uncertainties over international food and oil prices. He explicitly said that the MPC can look through perishable food price shocks “for some time”, but recurring shocks may be a problem,” said Rahul Bajoria, Managing Director and Asia emerging markets economist at Barclays

Earlier, some may have thought that Das’ stance was a little too steeped in bureaucratic conservatism. After all, he has had a long stint as a top bureaucrat in the Finance Ministry. But now, it is clear that he and the RBI were right all along.