RBI expects inflation to come down to 4% over the next two years

There may not be any respite from high and stubborn inflation any time soon as the Reserve Bank of India is expecting it to come down to 4% over the next two years.

“I have said earlier we are expecting to come down closer to the target [4% CPI inflation] over a two year cycle. That is our expectation even now. But there are so many uncertainties they are playing from time to time,” RBI governor Shaktikanta Das said during the post-policy interaction on Friday.

RBI which announced the review of policy today, decided to increase the policy repo rate by 50 bps to 5.9%.

According to the RBI Act, the monetary policy committee (MPC) of RBI has a 4 percent inflation target, with a variation of 2% on either side. It is seen as a failure of RBI if average inflation stays beyond the 2-6% range for three consecutive quarters. CPI inflation for the Jan-March and April-June was over 6% and the Jul-Sep quarters is not likely to be an exception.

If RBI fails to meet its inflation mandate then it has to write a letter to the government explaining the reasons for its failure and steps that would be taken to correct the situation. In addition, the RBI has to mention the timeframe it will need to bring back inflation to 4%.

“It’s a privileged communication between the Reserve Bank and government. So at this point of time we cannot say whether it will be made public.. from our side we will not make it public because it is a privileged communication,” Das said when asked if the RBI’s responses to the government will be made public.

Assuming average crude oil price (Indian basket) of $ 100 per barrel, RBI retained its inflation projection at 6.7 per cent in 2022-23, with Q2 at 7.1 per cent; Q3 at 6.5 per cent; and Q4 at 5.8 per cent. CPI inflation for Q1:2023-24 is projected at 5.0 per cent.