The central bank’s rate-setting committee will now have to negotiate between two contrasting approaches. One that tries to lower core inflation through more decisive demand compression, and the other that waits for preceding policy interventions to work their way through the system. The proactive course risks monetary tightening overshooting, especially as pointed out in the minutes there being no evidence of demand-led second-order inflation effects on prices and wages. The lower intervention option would wait for inflation pressure to subside in services. Real policy rates have turned positive, and further hikes are likely to have a bigger effect on growth than on supply-side inflation.
RBI projects headline inflation to dip to 5% in April-June on a high base effect, and subsequently climb to 5.4% in the next two quarters and 5.6% in the last quarter of 2023-24. It also expects the economy will slow down to 6.4% growth in 2023-24, in line with the Economic Survey forecast. These estimates may have to be revisited if further demand compression is required to tame core inflation. By themselves, supply-side measures may not be adequate to make a time-bound impact on inflation. The path to disinflation may need a bigger growth sacrifice.
