Shaktikanta Das: Disinflation process likely to be slow, but economy remains among fastest growing in 2023

A day after India's CPI inflation touched over 2-year low of 4.25%, RBI governor Shaktikanta Das on Tuesday said, the disinflation process is likely to be low. He reteriated that the latest two pauses in repo rate is not pivotal and not a definitive change in policy direction. However, in all likelihood, he sees India to remain remain among the fastest growing large economies in 2023.

At the Summer Meetings organised by Central Banking, London, UK, Shaktikanta Das said, "the cumulative impact of our monetary policy actions over the last one year is still unfolding and yet to materialise fully."

RBI has lowered its CPI inflation projection to 5.1% for the fiscal year 2023-24. However, Das said, "it would still be well above the target."

Inflation eased sharply to the lowest level in over two years at 4.25% in May 2023 — this is also near the RBI''s lower tolerance limit of 4%. 

He added, "as per our current assessment, the disinflation process is likely to be slow and protracted with convergence to the inflation target of 4 per cent being achieved over the medium-term."

Based on this realisation and with a view to assess the impact of past actions, he added, "we decided on a pause in the April and June 2023 meetings, but clarified unequivocally that this not a pivot – not a definitive change in policy direction."

According to Das, recognising that explicit guidance in a rate tightening cycle is inherently fraught with risks, the MPC has also eschewed from providing any future guidance on the timing and level of the terminal rate.

In recent times, Das highlighted that especially since the outbreak of the COVID-19 pandemic, central banks – who are at the core of monetary and financial systems – have been called to do “heavy lifting” well beyond their traditional mandate. Central banks have navigated through unchartered waters during the three black swan events – the pandemic, the war in Ukraine and the unprecedented scale and pace of global monetary policy normalisation – all in the span of three years.

Further, he mentioned, "more recently, central banks had to quickly change gears from providing stimulus to pandemic ravaged economies to battling inflation with all ammunition at their disposal. Even as the battle against inflation was ongoing, the banking turmoil in certain advanced economies (AEs) posed the awkward trade-off between financial stability and price stability."

"This extraordinary period of global turbulence has indeed been extremely challenging for central banks and central banking," he added.

But Das believes India is on its path to remain among the fastest growing large economies.

He said, "Indian economy has also made rapid gains in openness and has gradually integrated with the global economy over the years. Consequently, it is getting increasingly exposed to the vagaries of global headwinds."

However, Das also said, it pertinent to note that India’s growth in the last few years is mainly driven by robust domestic demand, especially private consumption and investment, amidst the global slowdown.

Looking ahead, he added, “we expect real GDP to grow by 6.5 per cent during 2023-24. In all likelihood, India will remain among the fastest growing large economies in 2023.”