Long years of inward-looking policies by govts to blame

IN THE THIRD week of October, the International Monetary Fund said in a blog post: "Let's start with the good news: it looks like the global battle against inflation has largely been won, even if price pressures persist in some countries."

- K G NARENDRANATH

Less than two months from then, that confidence appears dented to an extent. With global inflation inching up again, rate cuts by the US Federal Reserve and monetary accommodation in many other major economies, including India, may be delayed, and/or turn out to be lesser. This could weigh down global activity. Worse, even the best laid plans of the central banks could go astray, if the incoming Donald Trump administration's moves engender an escalation in global trade tariffs.

The Reserve Bank of India, in the past one year and more, has been bent on seeing inflation, as measured by the Consumer Price Index (CPI), moving to the 4% target on a durable basis. For eleven bi-monthly monetary policy reviews in a row, it kept the repo rate unchanged at 6.5%, but still had to contend with the headline print surging above the upper tolerance level to 6.2% in October. In the December policy review, the central bank raised the CPI inflation outlook for 2024-25 to 4.8% from 4.5%, with Q3 at 5.7% and Q4 at 4.5%, along with drastic downward revision of growth outlook.

Going into 2025-26, the RBI projected Q1 inflation at 4.6% and Q2 at 4%. If anything, the external outlook has only worsened since, with the US Fed now expected to cut only less in 2025. To be sure, the last mile of disinflation may throw up (negative) surprises, and global monetary outlook could substantially change. For the RBI, the situation has been compounded: it has to grapple with the risk of continued outflow of foreign portfolio capital due to higher US treasury yield, and a weaker rupee that could jack up imported inflation. However, it could take heart from the fact that global oil prices are tending to be rather subdued.