Dr. Hemangi Kelkar, Assistant Professor, School Of Economics, NMIMS-Navi
Mumbai
The RBI’s steps echo Mahatma Gandhi’s wisdom: “I am moving cautiously, watching myself at
every step.” But beneath this caution lies a fixed determination, that resonates profoundly in the
present macroeconomic landscape. The relevance of this can be examined in the context of
growth and inflation forecasts. The first monetary policy statement of 2024 arrives as the RBI
celebrates its 90th year of existence and operations. Over these decades, the central bank has
etched its name as a credible institution—one that stands for stability, trust, and economic
progress. But this year is more than just a milestone; it’s a juncture where the RBI’s legacy
converges with the challenges of the present.
The Cautious: Core inflation
The MPC convened on February 6th, 7th, and 8th, 2024. Their task: to assess evolving
macroeconomic and financial developments and chart a course. By a 5 to 1 majority, the MPC
held the policy repo rate unchanged at 6.50%. The standing deposit facility (SDF) and marginal
standing facility (MSF) rates remained steady too. The MPC’s focus remains fixed: withdraw
accommodation. This means ensuring inflation progressively aligns with the target while
supporting growth. The delicate balance between price stability and growth animates their
decisions. As the seasons change, so do the prices of essential commodities. Key
vegetables—onions, and tomatoes—are now undergoing a seasonal price correction. Amidst this
natural rhythm, the Reserve Bank of India (RBI) projects the Consumer Price Index (CPI) inflation
for 2024 is projected at 5.4 per cent, and next year (2025) is projected at 4.5 per cent which is still
expected to be above RBI’s Inflation target of 4 per cent.
India’s inflation trajectory has been a rollercoaster ride over the past few years. From the
demonetisation-induced deflationary shock to the recent surge in food and fuel prices, the RBI
has grappled with maintaining price stability. The Taylor rule, which suggests adjusting interest
rates based on inflation deviations, provides a theoretical framework. However, the real-world
dynamics are far more intricate. The Consumer Price Index (CPI) inflation has been inching
upward, driven by supply-side disruptions, global commodity prices, and domestic demand
recovery. Yet, the challenge lies in taming inflation without stifling growth.
Watching Every Move: Growth Resilience Amidst Global Headwinds
The Indian economy has displayed remarkable resilience despite global uncertainties. The
pandemic-induced contraction was followed by a sharp rebound, with GDP growth surpassing
expectations. The RBI’s accommodative stance during the crisis played a pivotal role in
supporting businesses and households. However, sustaining this growth momentum requires
calibrated policy adjustments. The Interim Union Budget 2024-25 also demonstrates continuity
in India’s economic policy. Finance Minister Nirmala Sitharaman revised the fiscal deficit estimate
for this year to 5.8% of GDP. The goal is a further reduction to 5.1% in 2024-25 and 4.5% in 2025-26. Fiscal discipline enhances India’s credit rating, opening doors for private sector funding. As
India aims for a $5 trillion GDP, access to foreign capital is critical.
It prioritises long-term measures over short-term fixes. Certainty is crucial for global investors.
By extending due dates for policies promoting domestic innovation and foreign investment, the
budget fosters stability.
Tax benefits for infrastructure investments by foreign sovereign wealth funds (SWFs) and
pension funds are extended, providing additional time for investment contemplation.
Fixed Determination: For price stability
The central bank balances immediate impact versus long-term stability. Communication
becomes critical here. Clarity in forward guidance ensures that market participants understand
the rationale behind policy decisions. Governor Shaktikanta Das’s press conference emphasised
the need for a data-driven approach. The RBI’s commitment to transparency and predictability is
evident. Yet, striking the right balance between data dependence and pre-emptive action
remains an ongoing challenge.
Beyond inflation and growth, the RBI must safeguard financial stability. The interconnectedness
of markets demands vigilance. The Taylor rule doesn’t explicitly account for financial stability
risks. The central bank’s macroprudential measures—such as liquidity management, capital
buffers, and stress tests—play a crucial role.
As the Indian economy sails through choppy waters, the RBI’s monetary policy decisions become
pivotal. The Taylor rule provides a compass, but the journey is far from linear. The central bank’s
ability to adapt, communicate effectively, and maintain equilibrium between inflation
containment and growth support will define India’s economic trajectory.
