RBI's focus on inflation control will help boost GDP expansion
- For price stability to serve as a firm base for sustainable 7.2% plus growth, RBI must meet its 4% inflation target. Deft liquidity modulation is crucial and credit quality mustn’t drop.
The Reserve Bank of India (RBI) has revised its projection of our GDP growth this fiscal year from 6.5% to 7%. Since 7.2% is the annual rate at which an economy must grow on average in real terms to double in size every decade, 7.2% has been a marker of sorts for India’s emergence. It was achieved last year, by government estimates, and has even been exceeded several times in the past. Today’s challenge, though, is to expand at that clip on a firm base of price stability, defined since 2016 as retail inflation held steady at 4% year-on-year. This will support faster growth by reducing a key risk borne by lenders and making loans cheaper overall. It also explains why RBI kept its policy rate unchanged at 6.5% in its rate-setting panel’s policy review of 8 December, retained “withdrawal of accommodation" as its stance, and has an “Arjuna’s quiver" handy for inflation control. Last year, the central bank used rate hikes of 2.5 percentage points to tighten credit. While RBI places inflation at 5.4% for 2023-24, which is below its alarm level of 6%, hitting the actual target looks set to stretch its fight to next fiscal year. Should it pan out as planned—shocks must not intervene—and the aim is struck sustainably, our economy could move into a better gear. As a credible cap on inflation can soften the cost of capital without Indian savers at large being repressed, it would also be equitable. And since this outcome’s pay-off is so high, RBI’s focus must not waver.