Mumbai: Bringing down inflation and stabilising inflation expectations can revive consumer spending, boost corporate profitability and spur growth in private capital expenditure, the Reserve Bank of India said on Friday
The RBI said the recent national accounts data and corporate results show that inflation is slowing down personal consumption expenditure, which in turn, is moderating corporate sales and holding back private investment in capacity creation.
“Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues and profitability, which is the best incentive for private capex,” RBI said in the ‘State of the Economy’ article, published in the central bank’s June bulletin released Friday.
The article has been authored by RBI Deputy Governor Michael Patra and other central bank officials. The RBI said the views are those of the authors and do not represent the institution’s views.
In the June policy, the six-member Monetary Policy Committee (MPC) left the repo rate unchanged at 6.5 per cent for the second time. The MPC expressed its view that inflation’s trajectory warrants ‘continuous vigil’.
The RBI raised the repo rate by 250 basis points (bps) between May 2022 and February 2023 to rein in inflation, which was above its comfort zone. One basis point is one hundredth of a percentage point.
Retail inflation or consumer price index-based inflation (CPI), which averaged 6.7 per cent in in 2022-23, eased to 4.25 per cent in May from 4.7 per cent in April.
In the minutes of the June MPC meeting released on Thursday, RBI Governor Shaktikanta Das said, “Our job is only half done, having brought inflation within the target band. Our fight against inflation is not yet over. We need to undertake a forward-looking assessment of the evolving inflation-growth outlook and stand ready to act, if the situation warrants.”
The RBI article said that it is axiomatic that the path to high but sustainable inclusive growth has to be paved by price stability. “Once this is realised, the trade-offs and dilemmas confronting the conduct of monetary policy fade away,” the article said.
The RBI has projected real GDP growth at 6.5 per cent for FY2024. The article said the flexible inflation targeting is in the final analysis the analogue of a growth preservation and promotion. “It is by no means the single minded pursuit of a single target as the critics would have us believe,” the authors said.
The RBI has been mandated by the government to maintain CPI at 4 per cent with a band of +/-2 per cent.
Agencies