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RBI expects headline inflation to ease from Sept highs


The Reserve Bank of India (RBI) expects headline inflation to ease from its September highs on the back of easing momentum and favourable base effects. To tame multi-year high inflation, the central bank has increased the key repo rate by 190 basis points since May this year. Inflation has surpassed RBI’s upper tolerance limit for nine consecutive months.

In its October 2022 bulletin, RBI said, “aggressive and synchronised monetary tightening has further weakened global economic prospects as financial markets sold off, investors took fright and jettisoned risky assets.”

For India, RBI’s bulletin said, “broader economic activity has remained resilient and poised to expand further with domestic demand accelerating as the contact-intensive sectors are experiencing a bounce-back. Robust credit growth and fortified corporate and bank balance sheets provide further strength to the economy.”

Further, the central bank added, “Headline inflation is set to ease from its September high, albeit stubbornly, on the back of easing momentum and favourable base effects.”

It added, “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…There has also been an appreciable decline in WPI inflation in September on a broad-based easing across its constituents. Easing in international price pressures embodied in commodity and supply chain pressures are also likely to contribute to the softening of costs and prices.”

According to RBI, 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. This may involve two milestones – first, bringing it within the tolerance band and second, lowering it to around its mid-point.

Also, RBI said, this trajectory will likely be gradual in view of the repeated shocks to which inflation has been subjected by both epidemiological and geopolitical causes, but the 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 fight against inflation will be dogged and prolonged, given the long and variable lags with which monetary policy operates and fraught with uncertainties.

Yet, RBI added, “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. This happy outcome will re-enthuse foreign investors, stabilise markets, and secure financial stability on an enduring basis.”

India’s inflation rose to a five-month high in September at 7.41% due to higher food prices. RBI’s monetary policy decisions are with the objective to achieve the medium-term target for consumer price index (CPI) inflation of 4% with a band of +/- 2% while supporting growth.

At present, inflationary pressure this year globally has pushed major central banks including RBI to take an aggressive approach to raise interest rates. Currently, the repo rate stands at 5.9%.

The MPC members have also decided to remain focused on the withdrawal of accommodation to ensure that inflation remains within the target going forward.

RBI expects inflation at 6.7% for the entire fiscal FY23 which is above its upper tolerance limit. The central bank predicts inflation at 7.1% in Q2, however, the figure is expected to slow down from Q3 at 6.5% and further to 5.8% in Q4. For the first quarter of FY24, RBI predicts inflation at 5%.

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