RBI compares inflation to a 'horse' to be kept on tight leash

RBI MPC: The Reserve Bank of India in its 10th consecutive monetary policy has decided to maintain the repo rate at 6.50 per cent. Governor Shaktikanta Das emphasised that the flexible inflation target framework has served the country well in navigating economic challenges. He emphasised the importance of vigilance in managing inflation, likening it to a horse that has been brought to a stable, close to the target but could easily bolt if not kept on a tight leash.

“Inflation horse has been brought to the stable closer to the target within the tolerance band. Now we have to be very careful about opening the door as the horse may simply bolt again, so we have to keep the horse in a tight leash so that we do not lose control," Das opined.

“The prevailing and expected inflation and growth balance have created a congenial condition for a shift in the monetary policy stance to neutral,” Das stated.

The Monetary Policy Committee (MPC) noted, "Headline inflation is on a downward trajectory," while also acknowledging that moderation may occur, albeit with potential elevation due to a higher base. Governor Das mentioned that food inflation could see some easing, supported by strong kharif crops, although he cautioned that adverse weather conditions continue to pose risks.

Regarding the overall economic landscape, he remarked, "The global economy remains resilient," despite facing geopolitical risks and elevated public debt that present downside risks. However, service activity remains robust, and inflation is showing signs of softening.

Das highlighted the growth indicators, stating, "Real GDP grew by 6.7 per cent in Q1, driven by a revival in private consumption," with the share of investment reaching its highest levels. On the supply side, he noted, "Gross Value Added (GVA) expanded by 6.8 per cent, aided by strong services and industrial activity," with agricultural growth bolstered by favourable kharif crop outcomes. As the MPC shifted its stance to neutral, Das highlighted the importance of these developments in supporting the overall economic environment, where manufacturing activity is improving, driven by enhanced domestic demand and a conducive policy environment.

Growth Forecast

In a recent statement, Reserve Bank of India ( RBI ) Governor Shaktikanta Das provided an optimistic yet cautious outlook for the Indian economy, projecting a robust real GDP growth rate of 7.2 per cent for the fiscal year 2024-25. The growth is expected to remain steady across the quarters, with 7.2 per cent in Q2, and slight increases to 7.4 per cent in Q3 and Q4. Notably, the first quarter of FY26 is anticipated to maintain a growth rate of 7.3 per cent, slightly above earlier forecasts.

Inflation Outlook

Das highlighted that risks to this growth outlook are evenly balanced, suggesting a stable economic environment. However, he noted that headline inflation softened in July and August, primarily due to base effects, although a divergence in food subcategories was observed.   RBI Governor projected inflation for FY25 at 4.5 per cent, projecting quarterly inflation numbers he said, “ For Q2 inflation is expected to be 4.1 per cent, for Q3 the inflation is likely to be at 4.8 per cent against 4.7 per cent projected in the last MPC, for Q4 CPI inflation is projected at 4.2 per cent and for Q1 of FY26 the retail inflation is projected at 4.3 per cent against 4.4 per cent projected earlier.”

Despite these fluctuations, Das pointed to signs of durable disinflation and a favourable agricultural crop outlook, which could ease food inflation in the coming months—provided that weather-related shocks do not occur. He expressed confidence that core inflation will likely be contained, although he acknowledged potential surprises in commodity prices.
Das cautioned against complacency, acknowledging that geopolitical conflicts and recent increases in certain commodity prices pose ongoing risks to the economic outlook. As the RBI navigates these challenges, the focus remains on achieving stability while fostering growth.