Informist, Tuesday, May 11, 2021

By Siddharth Upasani

Inflation may finally stabilise within the mandated range of 2-6% after a year-and-a-half, during which the Reserve Bank of India's Monetary Policy Committee flirted with failure on more than one occasion.

CPI inflation of 5.52% in March meant the quarterly average for Jan-Mar was under 6.0% for the first time in three quarters, ensuring that the committee did not fail to meet its mandate. And even though the RBI's latest forecasts see inflation averaging at 5.2% in the first half of 2021-22 (Apr-Mar), easing to 4.4% in Oct-Dec, and ending the year at 5.1%, the central bank would probably give the proverbial arm for those numbers to become reality.

The first of these readings, for April, will be released on Wednesday. And, assuming that the National Statistical Office navigates past the small matter of having a base index number which was derived from incomplete data, the expected inflation of 4.1% as per an Informist poll will be pleasant reading for the Monetary Policy Committee.

Whether the committee should treat the April and May inflation numbers as another "break" in the CPI series is a question for another day; indeed, it should be answered by the committee early next month in its statement. What is worth noting is that inflation may finally not be as pressing a concern as it has been since October 2019.

Core inflation, of course, remains a worry, having come in at 6.0% in March. One can expect the committee to continue sending warnings to the government on the importance of efficient supply management and the need to bring down taxes and tariffs, which are indirectly fuelling non-food, non-fuel prices.

A period of moderately stable inflation, however small this period may be, will perhaps help the RBI answer an important question: what is the role of monetary policy in these times? More precisely, what should the Monetary Policy Committee do over the next 6-12 months?

The repo rate is seemingly at its floor. Liquidity management and keeping bond yields at palatable levels is the RBI's responsibility. Growth is unlikely to be stimulated further through monetary policy. This leaves management of expectations, which can perhaps influence all spheres of the economy.

With inflation possibly heading into a period of relative lull, there is perhaps an opportunity for the committee to fine-tune the language of its statement, including the forward guidance.  End

Edited by Mainak Moitra

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