Fight against inflation will be dogged, prolonged: RBI report

The consumer price-based index (CPI), or retail inflation, accelerated to 7.4 per cent in September from 7 per cent in August. CPI has been above the Reserve Bank’s tolerance band of 2-6 per cent since January 2022, resulting in a 190 basis points (bps) increase in repo rate since May this year.

“The fight against inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates, and fraught with uncertainties,” the RBI said in its ‘State of the economy’ report.

“Yet, if we succeed, we will entrench India’s prospects as one of the fastest growing economies of the world enjoying a negative inflation differential with the rest of the world.” the RBI report said.

A positive outcome on inflation will re-enthuse foreign investors, stabilise markets and secure financial stability on an enduring basis, it said. The report has been authored by 28 RBI officials, including Deputy Governor Michael Patra. The views expressed in the report are of the authors and not of the institution, the report said.

While the persistence of headline CPI 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, the authors said.

“This may involve two milestones – first, bringing it within the tolerance band and second, lowering 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,” the RBI said.

Easing of inflation will inject confidence into both consumers and businesses, recharge animal spirits and investment and improve the international competitiveness of India’s exports, the report said.

Authors believe that 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, which has undergone repeated shocks in the first half of the year.

Looking ahead, India is poised to consolidate and accelerate the recovery over the rest of the year, they said.

According to them, the momentum of real gross domestic product (GDP) growth is expected to shed the drag embedded in the National Statistical Office’s (NSO) estimates of 26.7 per cent for the first quarter of 2022-23 and move into positive territory in the remaining quarters, including on a seasonally adjusted basis. “Although this may not be evident in year-on-year growth rates due to unfavourable base effects, quarter-on-quarter (q-o-q) annualised rates will reflect the underlying recovery, authors said.

The report further said contact-intensive sectors will likely lead the rejuvenation as the restraint due to the pandemic waned. Festival-related spending is already boosting consumption demand with positive externalities for other components of domestic demand, it added.