NEW DELHI: Indian economy has been showing signs of transition to a low-inflation regime since the second half of the 2022-23 financial year, even as global factors played a big role in the movement of inflation to a high regime from the second half of 2020-21 till the first half of 2022-23, a paper released by the RBI has said.
The paper authored by RBI deputy governor Michael Debabrta Patra and his colleagues said domestic factors were dominant in the high inflation regime prior to 2014.
“From the second half of 2022-23, the contribution of imported inflation had been gradually declining and domestic factors are playing a larger role, reflecting the increasing role of cyclically sensitive inflation,” according to the paper authored by Patra, Joice George and Asish Thomas George, which was published in the latest edition of RBI Bulletin.
Globally, inflation has emerged as a major policy challenge, prompting central banks to sharply raise interest rates.
In India, too, RBI raised rates aggressively but has now paused its hiking cycle as it assesses the impact of the earlier rate rises.
The paper said the supply shocks of 2020-22 increased the total variance of headline CPI (consumer price index) inflation as well as covariance among inflation in its sub-groups. “This translates to evidence that in the high inflation regime, there has been a generalisation of price pressures — they have spread across many sub-groups, which are experiencing more co-movement of high inflation than normally seen,” according to the paper.
“This is a clearer call for monetary policy action to quell inflationary pressures and contain their broad-basing. Again, the monetary policy actions and stance of the Reserve Bank through 2022- 23 are validated,” the paper added.
Elaborating on the strategy way forward, the paper says that in the absence of “unfavourable idiosyncratic” shocks, conditions are right for early signs of grudging disinflation to firm up into a central tendency. It says, inflation persistence and trend are on the decline, however gradual, suggesting that inflation expectations are slowly getting re-anchored as policy actions and stance are gaining traction and have started showing demand restraining influences.
“For monetary policy, the recommendation would be: wait and watch, while guiding inflation towards the imminent onset of a low inflation regime,” it said.
The paper says that since the second half of 2022-23, individual sub-groups are exhibiting higher volatility — sporadic supply shocks are at work — but, importantly, covariance is declining.
This suggests that generalisation or broad-basing of inflationary pressures is on the ebb and increasingly localised price movements are influencing headline inflation, the paper adds.
“This calls for fine-tuning measures to align demand and supply of specific goods and services, which lies outside the realm of monetary policy but are being undertaken on an ongoing basis to head off potential price pressures from getting deep-seated,” it says.
The paper authored by RBI deputy governor Michael Debabrta Patra and his colleagues said domestic factors were dominant in the high inflation regime prior to 2014.
“From the second half of 2022-23, the contribution of imported inflation had been gradually declining and domestic factors are playing a larger role, reflecting the increasing role of cyclically sensitive inflation,” according to the paper authored by Patra, Joice George and Asish Thomas George, which was published in the latest edition of RBI Bulletin.
Globally, inflation has emerged as a major policy challenge, prompting central banks to sharply raise interest rates.
In India, too, RBI raised rates aggressively but has now paused its hiking cycle as it assesses the impact of the earlier rate rises.
The paper said the supply shocks of 2020-22 increased the total variance of headline CPI (consumer price index) inflation as well as covariance among inflation in its sub-groups. “This translates to evidence that in the high inflation regime, there has been a generalisation of price pressures — they have spread across many sub-groups, which are experiencing more co-movement of high inflation than normally seen,” according to the paper.
“This is a clearer call for monetary policy action to quell inflationary pressures and contain their broad-basing. Again, the monetary policy actions and stance of the Reserve Bank through 2022- 23 are validated,” the paper added.
Elaborating on the strategy way forward, the paper says that in the absence of “unfavourable idiosyncratic” shocks, conditions are right for early signs of grudging disinflation to firm up into a central tendency. It says, inflation persistence and trend are on the decline, however gradual, suggesting that inflation expectations are slowly getting re-anchored as policy actions and stance are gaining traction and have started showing demand restraining influences.
“For monetary policy, the recommendation would be: wait and watch, while guiding inflation towards the imminent onset of a low inflation regime,” it said.
The paper says that since the second half of 2022-23, individual sub-groups are exhibiting higher volatility — sporadic supply shocks are at work — but, importantly, covariance is declining.
This suggests that generalisation or broad-basing of inflationary pressures is on the ebb and increasingly localised price movements are influencing headline inflation, the paper adds.
“This calls for fine-tuning measures to align demand and supply of specific goods and services, which lies outside the realm of monetary policy but are being undertaken on an ongoing basis to head off potential price pressures from getting deep-seated,” it says.
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