Inflation May Fall Faster To 4% If No Supply Side Shock

Certain high-frequency data reveal growth slowing. Given this, do you think MPC’s forecast of 6.5% GDP for FY24 seems over-optimistic?

The growth forecast is lower than the Central Statistical Office’s second advance estimate of 7% for FY23. So, it does take into account factors reducing growth. The economy has, however, shown resilience to external shocks, which are themselves less severe than expected. So, the forecast is feasible. The estimated demand leakage through net imports has fallen. This is one factor contributing to the rise in growth forecast from 6.4% last time to 6.5% now.

The overnight index swaps market is pencilling in a rate cut in the second half of the year. Is that reasonable?

They would do well to pay more attention to incoming data.

The minutes indicate you do not favour a further rise in interest rates. Are you indicating a prolonged pause?

I am indicating that further rate action will depend on the data on how realizations of inflation and growth impact their expected future values.

RBI’s monetary policy report is projecting inflation to fall to 4% by the end of the next fiscal year. When do you expect inflation to the 4% median?

If there are no further major supply shocks, it can fall faster since there is no excess demand or tight labour market-driven second-round effects keeping inflation high in India.

The market seems to be confused with the MPC’s communication. A statistical base effect is cited for MPC revising one-year inflation downward by 40 bps which has driven up real rates. Given this, how is the MPC justified in calling for a rate pause?

The forecast revisions in April do not justify the rate action. Since growth has proved more resilient than expected, the MPC can now focus more on achieving the inflation target. But since large global and weather-related uncertainties that affect both expected inflation and growth continue, it is better to pause and wait for more data as well as the lagged effects of past monetary policy actions. The downward revision in inflation is not just because of base effects or measurement issues. Momentum has also slowed. Surveys indicate firms are not passing on past inputs cost because of slack demand, and input cost increases have also reversed.