The Indian Experience. Inflation persistence and trend are on decline, however gradual: RBI monthly bulletin

There is a rising probability that inflation is transiting away from the high regime since the second half of 2022-23, with a decline in persistence and trend, even as it is exhibiting increasing sensitivity to demand factor, according to RBI’s latest monthly bulletin.

“Absent unfavourable idiosyncratic shocks, conditions are right for early signs of grudging disinflation to firm up into a central tendency,” according to the article “Recent Regime Reversal in Inflation: The Indian Experience” put together RBI by Deputy Governor Michael Patra, and officials Joice John and Asish Thomas George.

Also, inflation persistence and trend are on the decline, however gradual, suggesting that inflation expectations are slowly getting re-anchored as policy actions and stance are gaining traction and have started showing demand-restraining influences, they said.

On the ebb

For monetary policy, the authors’ policy recommendation is: wait and watch, while guiding inflation towards the imminent onset of a low inflation regime.

They observed that since the second half of 2022-23, individual sub-groups are exhibiting higher volatility – sporadic supply shocks are at work – but, importantly, covariance is declining.

This suggests that generalisation or broad-basing of inflationary pressures is on the ebb and increasingly localised price movements are influencing headline inflation.

“This calls for fine-tuning measures to align demand and supply of specific goods and services, which lies outside the realm of monetary policy but are being undertaken on an ongoing basis to head off potential price pressures from getting deep-seated,” the RBI officials said.

Additional evidence that inflationary pressures in India are easing is found in the decline in the month-on-month momentum of core inflation, reinforcing empirical support for a low inflation regime ahead of us from the proposition that headline inflation will inevitably converge to its core, they added.

“A dissonant note in our findings is that our cyclically sensitive inflation measure is increasing. This indicates that demand pull is increasingly gaining traction,”according to the authors.

For monetary policy, therefore, there can be not letting down of the guard.

The authors’ policy recommendation for the way forward is: the readiness to act pre-emptively to ensure that the disinflation that is underway is not interrupted.

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