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Asserting that India was weathering the inflation storm well, RBI Deputy Governor Michael Patra said the central bank is hopeful that it will be able to bring inflation back to target within a two-year time span.
If the monsoon brings with it a more benign outlook on food prices, India will end up taming the inflation crisis even earlier, Patra said at a PHDCCI event on ‘Geopolitical Spill-overs and Indian Economy’ on Friday.
‘Winning the war’
Patra also sees inflation falling back into the tolerance band by Q4 FY23 as the monetary policy works through the economy. “It may be a premature prognosis, but there are indications that inflation may be peaking,” he added. The key is the direction of change in inflation — not its level — in these extraordinary times, he said.
“Without a doubt, the impact of geopolitical risks will cause a very grudging decline in inflation and a possible breach of the accountability criteria but India will succeed in bending down the future trajectory of inflation, winning the war in spite of losing the battle,” he said.
Between April and June this year, RBI has effectively tightened monetary policy by 130 basis points. The stance has shifted from being “accommodative as long as necessary to revive and sustain growth on a durable basis ... while ensuring inflation remains within the target going forward” to “withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. India’s headline CPI inflation had moderated to 7 per cent in May 2022 from 7.8 per cent in April.
Resilient, stronger economy
Under the inflation targeting framework, RBI is expected to maintain the benchmark inflation rate as measured by the Consumer Price Index (CPI) at 4 per cent within a band of +/- 2 percentage points. Patra also expects a possible breach of the accountability criteria specified in the inflation targeting framework. He said RBI has surged ahead of the curve with its recent monetary tightening.
In Q1 FY23, available indicators of economic activity have improved. Unlike the rest of the world, India is getting resilient and stronger, and this is the best time to put the stabilising effects of monetary policy into action so that the costs of the economy are minimised, he added.
India is being impacted by the global inflation crisis, reflecting the materialising of geopolitical risks. Although it is largely driven by food and fuel supply disruptions and bottlenecks, mending supply always take time, he added.
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