Uncertain economic conditions to drag fight against inflation for long: RBI

The Monetary Policy Committee (MPC), which is the rate-setting panel, is currently striving to combat inflationary pressures in the economy, largely triggered by supply pressures emanating from the Russia-Ukraine war.

The fight to bring down stubbornly high inflation will be “dogged and prolonged” considering the lags with which monetary policy operates and the uncertainties involved, the Reserve Bank of India (RBI) said in its monthly bulletin.

“While the persistence of headline CPI (Consumer Price Index) inflation above the tolerance band for three consecutive quarters (up to September) will trigger mandated accountability processes, monetary policy remains focussed on realigning inflation with the target,” according to a paper titled ‘State of the Economy’ published in the bulletin.

This may involve two milestones, the paper showed. First, bringing inflation within the tolerance band and second, lowering it to around its mid-point. This trajectory will likely be gradual in view of the repeated shocks to which inflation has been subjected by both epidemiological and geopolitical causes, according to the paper.

RBI Deputy Governor and member of the Monetary Policy Committee (MPC), Michael Patra, has co-authored this paper. The views expressed in the article are those of the authors and do not represent the views of the RBI.

Inflation has been consistently above the MPC’s 2-6 percent target band for three consecutive quarters. This is the definition of failure under the flexible inflation targeting framework.

Headline retail inflation measured by CPI rose to 7.41 percent in September from 7 percent in August. With September’s print, inflation has now completed three full years above the central bank’s medium-term target of 4 percent.

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The MPC, which is the rate-setting panel, is currently striving to combat inflationary pressures in the economy, largely triggered by supply pressures emanating from the Russia-Ukraine war.

The MPC, in its quest to bring down inflation, has hiked the repo rate – the rate at which the RBI lends funds to banks – by 190 basis points since May. One bps equals one-hundredth of a percentage point. The repo rate currently stands at 5.9 percent and economists expect the MPC to hike it further up to 6.5 percent by March 2023.

According to the ‘State of the Economy’ paper, headline inflation is set to ease from its September high, albeit “stubbornly”, on the back of easing momentum and favourable base effects. These positive developments are likely to be driven by the food and beverages, it said. Easing in international price pressures embodied in commodity and supply chain pressures are also likely to contribute to the softening of costs and prices, the paper showed.

The RBI expects inflation to average at 6.7 percent in FY23. Thereafter, it expects inflation to drop to 5 percent in April-June 2024, closer to its target. The central bank governor Shaktikanta Das had given a two-year timeline for inflation to fall to 4 percent.

Against this backdrop, any easing in inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports, the paper said.

If the MPC succeeds in its endeavour, it will entrench India’s prospects as one of the fastest growing economies of the world enjoying a negative inflation differential from the rest of the world, according to the paper.

This “happy outcome” will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis, it said. India is poised to consolidate and accelerate the recovery over the rest of the year, it added.