RBI Needs To Shift Focus From Inflation Management To Growth Promotion: MPC Member

With retail inflation nearing the RBI’s target of 4 per cent, the monetary policy needs to shift focus on promoting growth, RBI MPC member Jayanth R Varma said on Monday.

Varma further said CPI inflation in 2024-25 is projected to be only about 0.5 percentage point above target, and core inflation is extremely benign.

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“The protracted period of intolerably high inflation is coming to an end… over the next few quarters, we will see further disinflation and inflation will reach the target of 4 per cent on a sustained basis,” he told PTI.

Varma, a professor at the Indian Institute of Management (IIM, Ahmedabad) noted that the fight against inflation has understandably come at a cost to growth.

Economic growth in 2024-25 is estimated to be 0.75-1 percentage points lower than the 8.2 per cent growth in 2023-24, he said adding India’s potential growth is about 8 per cent.

Earlier this month, the Reserve Bank of India pegged the GDP growth rate for FY25 at 7.2 per cent.

“Against this backdrop, monetary policy has to shift from a single-minded focus on inflation to balancing inflation against growth. We need a less restrictive monetary policy that maintains a steady pace of disinflation while supporting growth,” the MPC member said.

According to Varma, what is alarming is that the forecasts from the RBI survey of professional forecasters and elsewhere is that growth in 2025-26 will be roughly similar to the forecast for 2024-25.

In other words, he said the growth sacrifice of 0.75-1 percentage points will last not for one year, but for two.

He said that during the last few years, the government has taken several policy measures including digitalization, tax reforms, and higher infrastructure investment to boost the economic growth rate to its potential of 8 per cent.

Earlier this month, the Reserve Bank left its key interest rate (repo rate) unchanged for the eighth time in a row at 6.5 per cent.

The RBI has projected Consumer Price Index (CPI)-based retail inflation at 4.5 per cent for FY25 with 4.9 per cent in Q1 (April-June), 3.8 per cent in Q2, 4.6 per cent in Q3, and 4.5 per cent in Q4.

Retail inflation was 4.75 per cent in May.

The RBI, which has been mandated to ensure inflation remains at 4 per cent (with margin of 2 per cent on either side), mainly factors in CPI while arriving at its monetary policy.