Inflation Must Settle Near 4 Per Cent Target Before Rate Cut Consideration: RBI Governor Das

After several years, July saw inflation dip below the RBI’s 4 per cent target for the first time since 2019

Shaktikanta Das said that the RBI is closely monitoring both inflation and economic growth, asserting that tight monetary policies have had only a "minimal impact" on the country's growth.

Source : PTI

India's inflation must show consistent signs of stabilising around the Reserve Bank of India's (RBI) target of 4 per cent before any interest rate cuts can be considered, according to RBI Governor Shaktikanta Das. In an interview with NDTV Profit on Tuesday, Das mentioned that the central bank is closely monitoring both inflation and economic growth, asserting that tight monetary policies have had only a "minimal impact" on the country's growth.

After several years, July saw inflation dip below the RBI’s 4 per cent target for the first time since 2019. However, the central bank anticipates a rebound in inflation starting September. As a result, the RBI has maintained its policy rate unchanged for over 18 months.

In its recent policy review, the bank opted for a pause due to the persistent effects of food inflation on broader price levels. Das cautioned that cutting rates based on the recent dip in inflation would be a “serious policy mistake.”

At the same time, a new research paper has endorsed the RBI's inflation-targeting framework, arguing against radical changes. The paper, titled Inflation Targeting in India: A Further Assessment, argues that the current inflation targeting regime has been effective and should not be abandoned in favor of a more discretionary system, which the authors deem risky and counterproductive. The study was co-authored by economists Barry Eichengreen of the University of California, Berkeley, and Poonam Gupta from NCAER.

The authors suggest that the weight of food-price inflation in the Consumer Price Index (CPI) basket should be reduced to better reflect the conditions faced by Indian households. However, they also believe that the 4 per cent inflation target, with a tolerance band of +/- 2 percentage points, remains largely appropriate. The paper calls for minor adjustments to improve the overall performance of the inflation-targeting regime.

The inflation-targeting framework was first established in 2015 through an agreement between the RBI and the government, and was formalised by an amendment to the RBI Act in 2016. The target is subject to periodic review every five years.