Saturday 10 December 2022
- Advertisement -
EconomyRBI bulletin explains why fight against inflation will be 'dogged, prolonged'

RBI bulletin explains why fight against inflation will be ‘dogged, prolonged’

The struggle to lower inflation will be “dogged and prolonged”, considering the lags with which monetary policy operates and the uncertainties involved, the Reserve Bank of India (RBI) said in its monthly bulletin released on 17 October. “While the persistence of headline CPI (Consumer Price Index) inflation above the tolerance band for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focussed on realigning inflation with the target,” according to a paper titled "State of the Economy" published in the bulletin.

This may involve two milestones, the said. First, bringing inflation within the tolerance band and second, lowering it to around its mid-point. This trajectory will likely be gradual in view of the repeated shocks to which inflation has been subjected by both epidemiological and geopolitical causes, according to the paper.

The deputy governor and member of the Monetary Policy Committee (MPC), Michael Debabrata Patra, has co-authored this paper. The report comes with a disclaimer saying that the views expressed in the article are those of the authors and do not represent the views of the RBI.

The other authors of the report are GV Nadhanael, Madhuresh Kumar, Kunal Priyadarshi, Rajeev Jain, Harshita Keshan, Rigzen Yangdol, Palak Godara, Jobin Sebastian, Rohan Bansal, Priyanka Sachdeva, Avnish Kumar, Vijaya Agarwal, Akshara Awasthi, Deepika Rawat, Rajas Saroy, Ramesh Kumar Gupta, Ipsita Padhi, Aayushi Khandelwal, Sudhanshu Goyal, Harendra Behera, Pankaj Kumar, Kaustubh, Vineet Kumar Srivastava, Samir Ranjan Behera and Deba Prasad Rath.

explains current situation

Inflation has been consistently above the MPC’s 2-6% target band for three consecutive quarters. This is the definition of failure under the flexible inflation targeting framework.

Headline retail inflation measured by CPI rose to 7.41% in September from 7% in August. With September’s print, inflation has now completed three full years above the central bank’s medium-term target of 4%.

The MPC, which is the rate-setting panel, is currently striving to combat inflationary pressures in the economy, largely triggered by supply pressures emanating from the Russia-Ukraine war.

The MPC, in its quest to bring down inflation, has hiked the repo rate — the rate at which the lends funds to banks — by 190 basis points since May. One bps equals one-hundredth of a percentage point. The repo rate currently stands at 5.9% and expect the MPC to hike it further up to 6.5% by March 2023.

According to the "State of the Economy" paper by the RBI, headline inflation is set to ease from its September high, albeit “stubbornly”, on the back of easing momentum and favourable base effects. These positive developments are likely to be driven by the food and beverages, it said. Easing in international price pressures embodied in commodity and supply chain pressures are also likely to contribute to the softening of costs and prices, the paper showed.

Estimation for foreseeable future

The expects inflation to average 6.7% in FY23. Thereafter, it expects inflation to drop to 5% in April-June 2024, closer to its target. The central bank governor Shaktikanta Das had given a two-year timeline for inflation to fall to 4%.

Against this backdrop, any easing in inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports, the paper said.

If the MPC succeeds in its endeavour, it will entrench India’s prospects as one of the fastest-growing economies of the world enjoying a negative inflation differential from the rest of the world, according to the paper. This “happy outcome” will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis, it said. India is poised to consolidate and accelerate the recovery over the rest of the year, it said.

Click/tap on a tag for more on the subject

Related

Of late

More like this

[prisna-google-website-translator]