Headline inflation should soon come down to core inflation levels, says Ashima Goyal

India's headline inflation rate should "soon" come down to core inflation levels, Ashima Goyal, an external member of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) has said.

"Research now suggests, in current situations, it is core which is more steady and that affects inflation expectations and headline comes down to core. So we should see this happen soon," Goyal said on February 16 in Mumbai at Indian Institute of Management-Kozhikode's inaugural annual conference on macroeconomics, banking, and finance.

Core inflation is the rate of inflation without taking into account food and fuel items, whose prices can be volatile.

Data released on February 12 showed that India's headline retail inflation eased to a three-month low of 5.10 percent in January. This is the 52nd month in a row that it has been above the RBI's medium-term target of 4 percent.

Core inflation remains significantly lower, falling further to 3.6 percent from 3.9 percent in December, as per Moneycontrol calculations.

According to the RBI's official forecast, Consumer Price Index (CPI) inflation is seen averaging 5 percent in the current quarter before easing to 4 percent in July-September. However, it is expected to rise to 4.7 percent in the first quarter of 2025.

The central bank does not have an official forecast for core CPI inflation.

Commenting further on core inflation, Goyal said that while it is lower than the RBI's target, it is the headline rate that affects people's inflation expectations and wages.

"So we want to see the headline (inflation rate) come down to the target," she said.

On February 8, MPC left the policy repo rate unchanged at 6.5 percent for the sixth meeting in a row. It also voted to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. Commenting on the stance of the rate-setting panel, Goyal said it had to be viewed on the basis of how conditions had changed.

"The stance has to be understood coming from the pandemic times, when there was for the first time huge expansion of (RBI's) balance sheet, large amount of liquidity injected and overall stimulus, and therefore withdrawal. But currently, since we are not at the (inflation) target, we still want to focus on disinflation and reaching the inflation target. So we continue with that 'withdrawal' term. But now it has to be interpreted strictly in terms of the real rate or the policy rate still being disinflationary," Goyal said.

On India's public debt situation, Goyal, Emeritus Professor at Mumbai's Indira Gandhi Institute of Development Research, said there seems to be a lag in how changes in the government's finances are perceived.

"Recently…the IMF told us that our debt-to-GDP ratio is going to rise beyond 100 (percent of GDP). Well, this is happening in the US, but in India we are seeing deficit ratios come down… because we have much higher growth, you should see the ratios come down," Goyal said, referring to the IMF's observations in its recent Article IV consultation report.

"Our (debt) ratios are much higher than East Asia and so on. But it's partly because we have never been counter-cyclical. And this government seems to be conservative," she added.

According to her, the "big mistake" India made in the early years of the millennium was to spend more during years of high growth instead of building up buffers.

"But I think we are understanding the utility of buffers and creating fiscal buffers also. All this should gradually help people understand that the reality is different from their perceptions and things are changing on the ground."