Dovish RBI’s emphasis, views on core inflation puzzles economists

The Reserve Bank of India (RBI) has been emphasizing the importance of core inflation, excluding food, fuel, and precious metals, in its decision-making process. This shift in focus has left economists puzzled, as it differs from the RBI's usual approach to tracking headline inflation. The legal target for headline inflation is 4%, within a 2-6% band, but the recent decision to leave the policy repo rate unchanged at 5.25% has fueled speculation that the RBI is actually targeting core inflation.

Core inflation, as measured excluding food, fuel, and precious metals, remained unchanged at 3.9% in June, compared to 3.93% in May. However, headline CPI inflation rose to 4.38%. Excluding precious metals, core inflation stood at 2.5%, providing a more stable gauge of consumer demand. The RBI's decision to exclude certain volatile items reflects the desire to better understand discretionary consumption patterns.

With gold and silver inflation soaring, core inflation excluding precious metals is often referred to as 'super core' inflation. The RBI has stated that this metric is "benign" and is expected to rise to around 4% by the end of 2026-27. However, economists have expressed concerns about the clarity of the RBI's communication, suggesting that the central bank may consider policy recalibration if core inflation measures converge.

Despite the RBI's focus on core inflation, questions remain about whether it is indeed benign. ANZ economists Dhiraj Nim and Sanjay Mathur argue that early signs suggest inflation pressures are spreading beyond food and fuel, with rising price momentum in other items. This interpretation raises doubts about the RBI's inflation target, which currently stands at 4%.

The RBI's actions have been perceived as unexpectedly dovish, with Nomura economists expecting a potential rate hike only if there are indications of higher underlying inflation.