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Inflation may stay beyond RBI tolerance band for 3 straight quarters, says Michael Patra

Economic growth is unambiguously impaired when inflation stays above 6 percent, the Deputy Governor said. He added that the central bank hopes to rein in inflation within two years.

June 25, 2022 / 06:46 AM IST
Representative image

Representative image

India's retail inflation is likely to stay above the central bank's tolerance zone of 2 to 6 percent, Deputy Governor Michael Patra said on June 24, in the first public comments on the central bank's impending failure to meet its inflation-fighting objective.

"It is not about failure, it is about credibility of monetary policy which must be preserved," Patra said at a PHD Chamber of Commerce and Industry event in New Delhi. "Monetary policy should be accountable to the public without any escape clauses," he added.

Economic growth is unambiguously impaired when inflation stays above 6 percent, the Deputy Governor stressed. Patra said there are indications that inflation is peaking as monetary policy works through the economy. He said inflation will fall back in the zone in the fourth quarter of 22-23 and fall further next year.

In the world of global inflation crisis it is possibly better to look at change rather than level, the Deputy Governor said. Against this backdrop, it is hoped that required monetary policy action will be more moderate than in the rest of the world, he added.

The RBI's rate-setting panel increased the repo rate by 40 basis points in an unscheduled meeting on May 4 and by 50 basis points on June 8, leading to speculation over how many rate hikes will be announced to curb inflation. Economists expect the repo rate to be anywhere between 5.5 and 6 percent by the end of FY23.

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India's headline retail inflation rate was 7.04 percent in May, according to data released earlier this month. The rate has exceeded the medium-term target of 4 percent for 32 consecutive months. It was also the fifth month in a row that inflation was higher than the 6 percent upper limit of the 2-6 percent inflation mandate of the RBI.

The Central Bank sees Consumer Price Index (CPI) inflation averaging 7.5 percent in April-June, 7.4 percent in July-September, 6.2 percent in October-December, and 5.8 percent in the first quarter of 2023.

The rate-setting panel is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. With CPI inflation averaging 6.3 percent in the first quarter of 2022, the new forecasts say the panel would have failed when CPI data for September is released in October.

As per law, if the RBI fails to meet the inflation target, it must submit a report to the Centre—commonly referred to as "the letter"—spelling out the reasons for failure, the remedial actions it proposes to take, and an estimate of the time period within which inflation will return to target.

There are signs of inflation peaking right now, the Deputy Governor said, adding that the central bank hopes to rein in inflation within two years.

 

 

 
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first published: Jun 24, 2022 12:35 pm
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