“Our hope is the required monetary policy actions will be more moderate than in the rest of world and we will be able to bring back the inflation to target within a two-year time span,” Patra said in comments that should temper concerns about aggressive rate increases by the RBI to keep prices in check.
He said the MPC will discuss and draft the report to be sent to the government to explain the deviation from the inflation target, weighing in on the situation if the figure is not met for three successive quarters. The RBI is mandated to keep consumer inflation at 4% with a tolerance band of two percentage points on either side of that.
Inflation based on the Consumer Price Index (CPI) eased to 7.04% in May from an eight-year high of 7.79% in April. The next meeting of the MPC is scheduled for August 2-4.
“It may be a premature prognosis, but there are indications that inflation may be peaking,” Patra said. “In an alternative simulation, which incorporates the policy actions undertaken so far, the easing of inflation could be even sooner and faster… If the monsoon brings with it a more benign outlook of food prices, India will have tamed the inflation crisis even earlier.” High crude oil and food prices were a challenge, he said in his keynote address on Geopolitical Spillovers and the Indian Economy.
The RBI raised the policy rate by acumulative 90 basis points in two steps—on May 4 and June 8–raising its inflation forecast for FY23 by a percentage point to 6.7%.
Other central banks, including the US Federal Reserve, have been more hawkish in trying to manage inflation that has hit a multi-decade high.
Elevated fuel, food and commodity prices, stemming largely from the Russia-Ukraine conflict, are keeping prices up. “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 would succeed in bending down the future trajectory of inflation, winning the war in spite of losing the battle,” Patra said.
Retail inflation averaged 6.3% in the fourth quarter of FY22 and is projected at 7.5% in the first quarter of FY23 and 7.4% in the second quarter.
The deputy governor said research by the RBI and others clearly demonstrates that growth is impaired when inflation crosses 6%. “Hence, breaching the appropriate upper tolerance limit of 6% for India’s inflation target should trigger accountability if monetary policy has to remain credible,” he said.
RUPEE TARGET
The Indian currency hit an alltime low of 78.32 against the dollar on Thursday amid concerns of further capital outflows after the US Federal Reserve chairman Jerome Powell said it was “strongly committed” to lowering inflation. The rupee recovered marginally to 78.20 per dollar on Friday. Patra said the RBI did not have a target for the rupee but would cushion any sharp movements.
“We have no level in our mind, but we will not allow jerky movements–that is for certain–and let it be widely known that we are in the market defending the rupee against volatility,” he said.
GROWTH PROSPECTS
Monetary policy action will take its toll on spending and demand, Patra said. “What the RBI is trying to do is to stabilise the price situation when the economy is able to bear it because in the longer run, price stability is beneficial for growth,” he said. The central bank expects India’s economy to grow 7.2% in FY23, down from 8.7% in FY22.
“In the first quarter of 2022-23, available indicators of economic activity have improved. Unlike the rest of the world, India is recovering and getting resilient and stronger,” Patra said.
“This is the best time to put the stabilising effects of monetary policy into action so that the costs to the economy are minimised.”
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