‘Lowering inflation can lift consumer spending, profits’

Bringing down inflation and stabilising inflation expectations will revive consumer spending, boost corporate revenues and profitability, which is the best incentive for private capex, the Reserve Bank of India said in its State of the Economy report, stressing upon the need for a “continuous vigil” on price movements.

“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 central bank’s economic research department said in the monthly State of the Economy report.

Citing the latest national accounts data and corporate results which showed inflation is slowing down personal consumption expenditure, the central bank’s economic research wing backed the monetary policy decision to keep the rate unchanged and withdraw the accommodative stance.

“By keeping the policy rate unchanged, monetary policy has been effectively tightened in the near-term in terms of the real policy rate while maintaining a positive real rate four quarters ahead over which monetary policy is expected to work, given its lags,” the report said.

The RBI raised repo rate by 250 basis points since May 2022 helping to steer the disinflationary process. The headline inflation measured by Consumer Price Index was 4.25% for May, as compared with the high of 7.8% in April last year.

The central bank aims to bring inflation down further to 4% while the dilemma of maintaining growth momentum versus managing inflation always keeps policy makers engaged.

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