Governor Shaktikanta Das on Saturday said inflation is likely to ease gradually in the second half of the ongoing fiscal, “precluding the chances of a hard landing in India”.
“Overall, at this point of time, with the supply outlook appearing favorable and several high-frequency indicators pointing to resilience of the recovery in the first quarter of 2022-23, our current assessment is that inflation may ease gradually in the second half of 2022-23, precluding the chances of a hard landing in India,” Das said. “We will continue to calibrate our policies with the overarching goal of preserving and fostering macroeconomic stability,” he added.
Currently, the retail inflation has been over the RBI’s upper tolerance band of 6 percent for the fifth consecutive month in a row. Apart from this, domestic wholesale inflation has been in double-digits for over a year now.
Currently, RBI’s mandate is to keep retail inflation at 4 percent with a tolerance band of 2 percentage points, i.e. 200 basis points on either side.
Das further said that India experienced a devastating second wave of Covid-19 during April-June 2021, which triggered localized lockdowns, renewed supply chain disruptions, and rising retail margins, which resultantly pushed inflation above 6.0 percent during May-June 2021.
Further, the inflation pressures were reinforced by adverse spillovers from the current rising global commodity prices, Das said at the event.
“The inflationary pressures occurred even as there was unprecedented damage inflicted by the pandemic on economic activity – real GDP contracted by a humungous 23.8 percent in the first quarter of 2020-21 and by as much as 6.6 percent in the full financial year 2020-21,” he said.
Increased Rates
The MPC also decided to increase the policy repo rate by 40 basis points (bps) and 50 bps in May and June, respectively.
This was on top of the 40 bps effective rate hike through the introduction of the Standing Deposit Facility (SDF) at 3.75 percent, which resulted in a concomitant increase in the weighted average call rate (WACR), compared to the liquidity absorption rate under the fixed-rate reverse repo regime.
In early 2022, inflation was expected to moderate significantly to the target rate of 4 percent by Q3 of FY23, with a projected average inflation rate of 4.5 percent for FY23.
Das said this assessment was based on an anticipated normalization of supply chains, the gradual ebbing of Covid-19 infections, and a normal monsoon.
The median inflation projection from the Survey of Professional Forecasters at 5.0 percent for 2022-23 was also relatively benign.
Food Price
Further, on food prices, he said global prices reached a historical high in March and their effects were felt in edible oil, feed cost, and domestic wheat prices.
“The loss of rabi wheat production due to an unprecedented heat wave put further pressures on wheat prices. Cost-push pressures were also aggravated by supply chain and logistics bottlenecks due to the war and sanctions,” the Governor said.
While in some advanced economies, the pricing power of firms has increased significantly due to strong domestic demand since 2021, other advanced economies and emerging market economies have just started experiencing such pressures beginning in 2022.
