RBI Governor Expresses Doubts About Achieving 6% Inflation Target

RBI faces challenges in meeting 4% inflation target; India hikes windfall tax on crude oil; markets remain stable despite geopolitical tensions.

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RBI Governor Expresses Doubts About Achieving 6% Inflation Target

RBI Governor Expresses Doubts About Achieving 6% Inflation Target

Reserve Bank of India (RBI) Governor Shaktikanta Das has stated that the central bank faces challenges in bringing inflation down to its medium-term target of 6%. In recent remarks, Das emphasized that the "last mile" in achieving the government-mandated 4% inflation target is proving to be the most difficult.

India's headline retail inflation rate eased to a nine-month low of 4.85% in March, according to data released by the Ministry of Statistics and Programme Implementation. Despite this positive development, the RBI remains cautious about the path ahead in managing inflationary pressures.

The central bank has also taken action against several co-operative banks for non-compliance with its directives. Additionally, the RBI plans to issue a circular regarding key facts statements for loans and the framework for fintech self-regulatory organizations.

In other economic news, the Indian government has raised the windfall gains tax on domestically-produced crude oil by 2,800 rupees per ton to 9,600 rupees per ton. This marks the 40th revision of the windfall gains tax since its introduction in July 2022. The tax changes reflect the movement of international crude oil prices and fuel margins over the past couple of weeks, with Brent crude oil trading in the range of $89-$92 per barrel.

The increase in windfall gains tax is seen as a negative development for upstream oil companies like ONGC, Oil India, and Vedanta. The government imposed these taxes to tax the windfall profits of crude oil producers and fuel exporters due to high oil and fuel prices globally.

Despite recent military action between Israel and Iran, India's foreign exchange and debt markets remained mostly unperturbed. The RBI's intervention kept pressure off the dollar-rupee pair, and crude oil futures remained largely steady. The yield on India's 10-year benchmark gilt ended flat, although the rupee did hit a record closing low against the dollar.

The Indian banking sector is also witnessing some positive developments. Large corporate loans and renewed underwriting processes are aiding public sector banks in improving their asset quality. Banks' credit to deposit ratio is estimated to have risen to 78% as of March, and business correspondents now perform over 20 types of banking services.

To summarize, while India's inflation rate has eased in recent months, the RBI Governor has expressed doubts about achieving the medium-term target of 6%. The central bank remains vigilant in managing inflationary pressures and has taken action against non-compliant co-operative banks. The Indian government's increase in windfall gains tax on domestically-produced crude oil reflects the movement of international oil prices and is seen as a negative for upstream oil companies. Despite geopolitical tensions between Israel and Iran, India's foreign exchange and debt markets have remained relatively stable, supported by RBI intervention.

Key Takeaways

  • RBI faces challenges in bringing inflation to 4% target, last mile proving difficult
  • RBI takes action against co-op banks, plans circulars on loans and fintech SROs
  • Govt hikes windfall tax on domestic crude oil by 2,800 rupees to 9,600 rupees/ton
  • India's forex and debt markets remain stable despite Israel-Iran tensions
  • Public sector banks see improved asset quality from corporate loans and underwriting