Front-loading of monetary policy actions can keep inflation expectations firmly anchored: RBI Bulletin

Monetary policy has to perform the role of nominal anchor for the economy as it charts a new growth trajectory, and the focus should be on being time consistent in aligning inflation with the target, according to an article published in the RBI Bulletin.

“In this context, front-loading of monetary policy actions can keep inflation expectations firmly anchored and reduce the medium-term growth sacrifice,” stated the article, ‘State of the Economy’.

“Loss of momentum in global economic activity may be taking the edge off inflation, which remains elevated. The Indian economy is poised to shrug off the modest tapering of growth momentum in the first quarter of FY23. Aggregate demand is firm and poised to expand further as the festival season sets in. Domestic financial conditions remain supportive of growth impulses. Inflation remains elevated and above the tolerance level, underscoring the need for monetary policy to keep second order effects contained and inflation expectations firmly anchored,” it added.

Inflation rises

There is, however, a resurgence of food price pressures, mainly stemming from cereals even as fuel and core components provided a modest measure of respite. Spatial unevenness in rainfall in September has set off an upsurge in the prices of key vegetables, particularly, tomatoes. On the food front, furthermore, we need to brace up for the impact of the predicted delayed withdrawal of the monsoon. “Barring these pressure points and the huge uncertainty surrounding energy prices in spite of the recent softening, we maintain our view that inflation momentum should ease in Q3 and turn mildly negative in Q4,” said the article.

High-frequency indicators of economic activity indicate continued recovery albeit at a slower pace in Q2 FY23. This is most evident in aggregate supply conditions. With the late revival and spread of the monsoon to the deficit regions and predictions of a delayed withdrawal, kharif sowing is set to exceed last year’s acreage. Even paddy and pulses are swiftly catching up. Reservoir levels will buffer up rabi prospects. Hence, the foodgrains production target of 328 million tonnes for FY23 — 4 per cent above last year’s output — appears to be in the striking range. The momentum of industrial production did turn negative in July, but that was after 7 months of continuous increase, said the article.

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