RBI 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 favourable 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.
With the origins of this inflation being essentially in the supply side, energy and food prices account for over 50 per cent of the rise in prices, the Reserve Bank of India (RBI) Governor said. “There are also increasing signs of sectoral price spillovers, given that the rise in global energy and commodity prices quickly translate into higher input price pressures,” he said at an event organised by the Institute of Economic Growth in New Delhi.
Household inflation expectations have started firming up, though they are not severely unanchored at this stage. “Overall, we are now living in an era of globalisation of inflation amidst growing deglobalisation of world trade,” Das observed.
Taking stock of the evolving developments and with inflation pressures getting generalised, the Monetary Policy Committee (MPC) of the RBI in its April and June meetings revised the projection of inflation for FY23 in two stages to 6.7 per cent. About three-fourths of the revision in June was on account of geopolitical spillovers to food prices.
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 per cent, 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 per cent by Q3 of FY23, with a projected average inflation rate of 4.5 per cent for FY23. This assessment was based on an anticipated normalisation of supply chains, the gradual ebbing of Covid-19 infections and a normal monsoon, Das said. The median inflation projection from the Survey of Professional Forecasters at 5.0 per cent for 2022-23 was also quite benign.
“This narrative was, however, completely overtaken by the war in Europe since end-February, which led to a sharp spike in global crude oil and other commodity prices,” he said.
Global food 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, Das added.
While in some advanced economies, 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 2022.