Conditions not ripe for easing restrictive monetary stance

The recent meeting of the Monetary Policy Committee (MPC) highlighted the need to maintain a restrictive monetary stance due to persistent risks to price stability, as outlined by RBI Deputy Governor Michael Debabrata Patra.

Key Highlights of the Meeting

• Inflation Concerns: Recent inflation data, especially in food prices, indicates ongoing risks. Food inflation, which remained at 8.52% in March, shows resilience, particularly in cereals and meat.
• Price Momentum: Experts pointed out a build-up of price momentum with rising temperatures as summer approaches, indicating potential challenges until May 2024.
• Headline Inflation: Despite some disinflation in core areas and fuel, headline inflation might remain on the higher side until favorable base effects kick in during the second quarter of 2024-25.

1: Dimension - Reasons for Maintaining Restrictive Stance

• Persistent Inflation Risks: The steady core disinflation and fuel price de-escalation do not ensure a quick alignment of headline inflation with the target. Until significant base effects are seen, maintaining a restrictive stance is crucial.
• Uncertainty in Inflation Trajectory: Experts stressed the importance of maintaining downward pressure on inflation until clearer signs of a durable decline in inflation are evident and uncertainties in the near term are resolved.

2: Dimension - Impact of Loose Monetary Policy

• Inflationary Pressure: Loose monetary policy could fuel inflationary pressures, particularly with the vulnerability of the inflation trajectory to frequent supply-side shocks, especially in food inflation due to adverse weather conditions.
• Price Stability Concerns: RBI Governor emphasized the need to remain focused on ensuring durable price stability, highlighting the risks associated with supply-side shocks spilling over into core inflation.

3: Dimension - Required Measures

• Balancing Growth and Inflation: Any relaxation in the monetary stance should be contingent on a durable decline in inflation and a more balanced risk outlook, ensuring that it doesn't compromise the objective of maintaining price stability.
• Enhanced Confidence: Experts mentioned that a stronger revival in private consumption and corporate sales growth requires greater confidence in a sustained decline in inflation.

Mains Practice Question

Q: “Inflation remains a persistent challenge despite various measures”. Discuss the factors contributing to this and suggest strategies for effective inflation management.