Disinflation May Pave Way for Interest Rate Cut: RBI Officials

Syllabus:  GS-III, Economy;

Subject: Polity and Governance, Economy;

Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment, Inflation and associated terms;

Issue: Disinflation;

Context:  the Reserve Bank of India published ‘State of the Economy’ article in the December 2023 edition of its Bulletin.

Key highlights of the ‘State of the Economy’ article:

• Cautious optimism: Indian economy remained the fastest growing major economy in 2023.
  • The outlook is one of cautious optimism as consumer confidence remains positive and perceptions about current income turned up in the RBI’s latest survey of households.
• Sustaining growth: projections from Dynamic Stochastic General Equilibrium (DSGE) model for the Indian economy, show that the growth is likely to be sustained in H2:2023-24 and 2024-25.
  • DSGE model captures the dynamic interactions between various agents in the economy as well as their response to shocks.
• Interest rate reductions: disinflation at varying pace in different geographies may pave the way for interest rate reductions.
• Background: What is Disinflation?  
  • Disinflation is a decrease in inflation rates.
  • Disinflation is a temporary slowing of the pace of price inflation. The term is used to describe occasions when the inflation rate has reduced marginally over the short term.
  • In simple terms, a decline in the rate of increase in the general price level of goods and services in the gross domestic product (GDP) of a country over time. Disinflation is the reverse of reflation.
  • Unlike inflation and deflation, which refer to the direction of prices, disinflation refers to the rate of change in the rate of inflation.

  A healthy amount of disinflation is necessary since it prevents the economy from overheating.