Reserve Bank of India (RBI) Governor Shaktikanta Das has said the disinflation process is likely to be slow and protracted with convergence to the inflation target of 4% being achieved over the medium term. The RBI's mandated target for consumer price index-based inflation (CPI) is 4%, with a band of +/- 2%.
Das said in recent months, there have been signs of some softening in inflation, with headline inflation easing to 4.25% in May 2023 from the peak of 7.8% in April 2022.
"The cumulative impact of our monetary policy actions over the last one year is still unfolding and yet to materialise fully. While our inflation projection for the current financial year 2023-24 is lower at 5.1 per cent, it would still be well above the target," Das said during an opening plenary address at the summer meetings organised by Central Banking, London, UK.
He said keeping these points in mind, the RBI decided to pause key policy changes in the April and June 2023 meetings but clarified unequivocally that this was not a pivot. "...not a definitive change in policy direction," he said.
On growth concerns, the RBI governor said India’s growth in the last few years is mainly driven by robust domestic demand, especially private consumption and investment, amid the global slowdown.
"Looking ahead, we expect real GDP to grow by 6.5 per cent during 2023-24. In all likelihood, India will remain among the fastest growing large economies in 2023."
Talking about the regulatory and supervisory initiatives, Das said the RBI's approach to regulation and supervision has been essentially premised on three pillars -- strengthening governance and assurance functions, boosting supervisory systems and identifying and addressing the root causes of vulnerabilities in banks and financial entities.
"Summing up, our approach towards maintaining the stability of the Indian financial system is integral to our conduct of monetary policy as financial instabilities can undermine economic growth and impede monetary policy transmission. We recognize that the likelihood of financial turbulence would be high if there is no price stability," said the RBI Governor.
Das said the RBI's "balanced" consultative approach with stakeholders on policy formulation has helped reinstate the much-needed confidence, provided market guidance, and helped anchor expectations.
"Central bank communication was tested to the hilt and on two major counts as the pandemic unfolded: we had only the digital interface to communicate with media and other stakeholders, and the target audience changed from experts to the general public with attendant challenges."
According to the RBI chief, being proactive and nimble-footed during a crisis gave it the agility to respond speedily to evolving overwhelming developments. Also, the central bank's monetary policy actions reinforced the policy impact and its credibility, he said.