Disinflation Process Likely To Be Slow, Protracted: RBI Governor

Reserve Bank Governor Shaktikanta Das on Tuesday said the disinflation process in India will be slow. “As per our current assessment, the disinflation process is likely to be slow and protracted with convergence to the inflation target of 4 per cent being achieved over the medium-term,” he said in his address at the Summer Meetings organised by Central Banking in London.

In remarks that came a day after official data suggested a cool-down in headline inflation to 4.25 per cent for May, Mr Das said there have been signs of some softening in inflation in recent months, with the consumer price inflation coming down from the 7.8 per cent peak in April 2022.

He said the RBI’s inflation projection for the current financial year 2023-24 is lower at 5.1 per cent, but reminded that the number will still be above the 4 per cent target.

The rate-setting panel has eschewed from providing any future guidance on the timing and level of the terminal rate recognising that explicit guidance in a rate tightening cycle is inherently fraught with risks, Mr Das said.

The RBI is mandated to maintain price stability while keeping in mind the objective of growth, Das said, adding that the central bank cannot be oblivious to growth concerns, given the high population and the necessity to reap the demographic dividend.

The RBI prioritised growth during the pandemic years even as inflation remained above the target but within the tolerance band, Mr Das said.

The Monetary Policy Committee prioritised growth over inflation at the height of the pandemic during 2020 and 2021, given the frail economic conditions and notwithstanding intermittent inflationary pressures from supply shocks, he added.

“Proactive and coordinated response of fiscal and monetary policies nurtured a quick recovery, while various structural reforms related to banking, digitalisation, taxation, manufacturing and labour, implemented in the last few years, laid the foundation for strong and sustainable growth over the medium and long term,” Mr Das said, noting that real GDP growth bounced back after the contraction in FY21.

In FY24, the RBI is estimating real GDP growth to come at 6.5 per cent and India will remain among the fastest-growing large economies in 2023 in all likelihood, he said.

He welcomed the government’s continued thrust on capital expenditure, which is creating additional capacity and nurturing the much-awaited revival in the corporate investment cycle.

“We recognise that the likelihood of financial turbulence would be high if there is no price stability. This reinforces our belief in the complementarity of monetary policy and financial stability in the long run,” he said.

The RBI has taken a slew of measures on the regulatory and supervisory front as well, Mr Das said.

These include a supervisory strategy which has seen a unification of supervisory architecture, ownership-agnostic and risk-focused supervision and a shift from episodic to continuous supervision, he noted.

Without interfering with business decision-making at banks, the RBI has done a deep dive into the business models of banks and other lending entities and closely monitors their asset-liability mismatches and funding stability, the governor said.

“We have a system of early warning signals that provide lead indications of risk build-up…We also remain engaged with the external auditors to flag issues that are relevant for their role,” he added.

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