Retail inflation will likely ease gradually in the second half of this fiscal, “precluding the chances of a hard landing” or recession, Reserve Bank of India (RBI) governor Shaktikanta Das said on Saturday.
“Our endeavour has been to ensure a soft landing (a moderation in inflation closer to targets with only a moderate slowdown in output growth),” Das said, indicating that cooling price pressure may reduce the need for aggressive monetary action.
Delivering a speech at the first edition of the Kautilya Economic Conclave in Delhi, the governor said the RBI will continue to calibrate its policies with the overarching goal of preserving and fostering macroeconomic stability. “In this endeavour, we will remain flexible in our approach while being cogent and transparent in our communication,” he added.
At this point of time, the supply outlook appears favourable and several high-frequency indicators point to resilience of the recovery in the June quarter, the governor said. Das’ statement may lead to expectations of revisions in inflation projections in coming policy updates.
The central bank last month raised its inflation projection for FY23 to 6.7% from 5.7% earlier. It had said inflation could stay above 6% in the first three quarters of this fiscal. About three-fourths of the revision in June was triggered by geopolitical spill-over to food prices, Das said. Retail inflation in India dropped to 7.04% in May from an eight-year high of 7.79% in the previous month. It still remained above the central bank’s tolerance band of 2% to 6% for a fifth month.
As for growth, the RBI had in April revised down its FY23 forecast for the country to 7.2% from 7.8%, which was more conservative than the International Monetary Fund’s projection of 8.2%. Central banks across the globe continue to grapple with runaway inflation, exacerbated by supply-chain disruptions in the wake of the Russia-Ukraine war that caused the commodity prices to spike.
The RBI, too, acted by raising the benchmark lending rate by 90 basis points since May.
The governor highlighted that the impact of global factors on Indian inflation has risen over the past three years—initially due to the pandemic and now due to the Ukraine war.
“While global factors have always been an important driver of domestic inflation, what we have witnessed over the past three years is the more protracted and sizeable role of global factors in proportions not witnessed in decades. These factors have an even more conspicuous effect on net commodity importing countries like India,” Das said.
These global factors, Das stressed, present difficult policy trade-offs between price stability and stabilising economic activity, especially when the economy is recovering from repeated shocks. They exacerbate macroeconomic and financial stability challenges from volatile capital flows in a financially globalised world.
These recent developments “call for greater recognition of global factors in domestic inflation dynamics and macroeconomic developments, which underscore the need for enhanced policy coordination and dialogue among countries to achieve better outcomes”, Das said.