RBI (Reserve Bank of India) Governor Shaktikanta Das on Saturday expressed optimism that inflation would come down during October-April of the current fiscal (FY 2022-23). He also assured a flexible approach to monetary policy making.

“At this point of time, with the supply outlook appearing favourable and several high frequency indicators pointing to resilient recovery in the first quarter (April-June) of 2022-23, our assessment is that inflation may ease gradually in the second half of 2022-23, precluding the chances of a hard landing in India,” Das said, while addressing the Kautilya Economic Conclave organised by the Finance Ministry and the Institute of Economic Growth here.

Retail inflation based on the Consumer Price Index (CPI) has been over 6 per cent in recent months, with April recording an eight-year high of 7.9 per cent. At the same time, producers’ inflation based on the wholesale price index (WPI) was at a nearly four-decade high of 15.8 per cent in May.

Considering inflation is above the upper band of the target (2-6 per cent, median rate of 4 per cent), the Monetary Policy Committee (MPC) has raised the policy interest rate twice, with one more hike expected next month.

According to Das, in early 2022, inflation was expected to moderate significantly to the target rate of 4 per cent by Q3:2022-23, with a projected average inflation rate of 4.5 per cent for 2022-23. This assessment was based on an anticipated normalisation of supply chains, the gradual ebbing of Covid-19 infections and a normal monsoon. The median inflation projection from the Survey of Professional Forecasters at 5.0 per cent for 2022-23 was also quite benign.

Sharp spike in crude oil prices

This narrative was, however, completely overtaken by the war in Europe since end-February, which has led to a sharp spike in global crude oil and other commodity prices. Global food prices reached a historical high in March and their effects were felt in edible oils, feed cost and domestic wheat prices. The loss of Rabi wheat production due to an unprecedented heat wave put further pressure on prices. Cost-push pressures were also aggravated by supply chain and logistics bottlenecks due to the war and sanctions.

On the one hand, RBI initiated measures, and on the other, the government lowered levies on fuel and upped the outlay on fertiliser subsidy. The results of these efforts were seen in May when retail inflation rate dropped to a little over 7 per cent and a further correction is expected when the data for June comes out next month.

Das said in a broader sense, inflation is a measure of the trust and confidence that the public reposes in the economic institutions of a country. While factors beyond our control may affect inflation in the short run, its trajectory over the medium-term is determined by monetary policy. Therefore, “monetary policy must take timely actions to anchor inflation and inflation expectations so as to place the economy on a strong and sustainable growth pedestal. We will continue to calibrate our policies with the overarching goal of preserving and fostering macroeconomic stability. In this endeavour, we will remain flexible in our approach, while being cogent and transparent in our communication. If history is any guide, I am optimistic that our actions will usher in a new era of prosperity in the years ahead,” he said.