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Upside risks to inflation remain, says RBI Deputy Governor Michael Patra

The central bank has increased the policy rate by 140 basis points in the last three-and-a-half months, although it thinks inflation peaked in April

August 26, 2022 / 03:57 PM IST

Upside risks to Indian inflation still remain even as it has declined from its peak, according to Michael Patra, a deputy governor at the Reserve Bank of India (RBI).

“Although it (inflation) appears to be moderating from its peak of 7.8 percent in April this year, we would prefer to await more incoming data before we are convinced that this a durable trend,” Patra said in a speech on August 24.

“While some easing of international commodity prices and supply chain pressures, both globally and domestically, are positive developments, upside risks remain in the form of potential second order effects and the transmission of input cost pressures to the sticky core component of inflation,” Patra added.

Patra delivered the speech at the SAARCFINANCE Seminar in New Delhi earlier this week. The speech was made public by the RBI on August 26.

India’s headline retail inflation rate, as measured by the Consumer Price Index (CPI), fell to 6.71 percent in July. Inflation had jumped to a near-eight-year high of 7.79 percent in April following a surge in global commodity prices after Russia invaded Ukraine in late February.

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While CPI inflation in July was the lowest in five months, it has been above the RBI’s medium-term target of 4 percent for 34 consecutive months and spent seven straight months outside the central bank’s 2-6 percent tolerance range.

In the near term, Patra said on August 24, India’s inflation trajectory is “heavily” dependent on geopolitical and global financial market developments and international commodity prices.

As per the RBI’s forecasts, CPI inflation is expected to average 7.1 percent in July-September, 6.4 percent in October-December, 5.8 percent in January-March 2023, and 5 percent in April-June 2023.

The deputy governor’s comments come after RBI Governor Shaktikanta Das told television channel ETNow on August 23 that inflation had peaked at 7.8 percent and the central bank wanted to bring inflation closer to its 4 percent target over a two-year period.

Also read: RBI’s assessment of inflation falling to 4% over next 2 years seems accurate, say economists

In a bid to bring down inflation, the RBI’s rate-setting panel, or the Monetary Policy Committee (MPC), has already hiked the repo rate by 140 basis points since the beginning of May to 5.4 percent. One basis point is one-hundredth of a percentage point.

However, despite the rate hikes, the central bank is on track to have failed to meet its inflation mandate when CPI data for September will be released in the second week of October. The RBI is deemed to have failed when average inflation is outside the 2-6 percent tolerance range for three straight quarters.

“If the inflation target is breached for a prolonged period, this could unsettle expectations and eventually get reflected in higher inflation. Higher credibility can reduce – not substitute for – the monetary policy response to second-round effects of repeated supply shocks. At the current juncture, our experience is that by frontloading monetary policy actions, credibility is demonstrated by showing commitment to the inflation target,” Patra said in his speech.
Moneycontrol News
first published: Aug 26, 2022 03:39 pm
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